Monthly Economic Report (March 2008)


Assessment of the current state of the Japanese economy


  The economic recovery appears to be pausing recently.
  As for short-term prospects, against the background of gradual resolution of the impact of the revised Building Standard Law, the Japanese economy is expected to recover moderately with the increasing trend of exports. However, attention should be given to downside risks increased by the slowdown of the U.S. economy and the fluctuations in the stock and exchange markets mainly caused by the subprime mortgage loan problem, and effects of developments of oil prices.


Policy stance

  The Government will promote reforms based on the "Direction and Strategy for the Japanese Economy" and the "Economic and Fiscal Reform (Basic Policies) 2007" in an integrated manner.
  The Government is going to publish "the earlier implementation measures towards the strengthened growth (tentative)" in early April, which consists of the concrete plan to strengthen Small-and Medium-sized enterprises, improve the employment, and revitalize regional economy and so on.
  In order to ensure sustained economic growth led by private-sector demand while achieving a stable level of inflation rate, the Government and the Bank of Japan conduct policies by sharing basic perspectives on macroeconomic management indicated in the above mentioned Basic Policies.


Detailed explanations


1.Demand trends such as consumption and investment

Private consumption is almost flat.
  Private consumption is almost flat. Consumer confidence has been deteriorating and income remains almost flat. The Synthetic Consumption Index, which synthesizes demand-side statistics (Family Income and Expenditure Survey etc.) and supply-side statistics (Indices of Industrial Producer's Shipment etc.), increased in January in comparison to December and has remained almost flat.

  As for short-term prospects, since employment improvement appears to be pausing and income remains almost flat, private consumption is expected to remain broadly flat.

Business investment is almost flat.
  Business investment is almost flat. The Quarterly Financial Statements Statistics of Corporations by Industry, which is a demand-side statistic, shows that business investment increased in the July-September quarter of 2007, whereas it decreased in the October-December quarter of 2007.

   According to the Bank of Japan short-term business sentiment survey (tankan), planned business investment in fiscal 2007 is expected to increase for the fifth consecutive year for industries in total. Corporations sense of excess capacity, which indicates the future trend of business investment, is flat.

  As for short-term prospects, we need to keep a close watch on the situation since corporate profits have been in a weak tone.

Housing construction has almost picked up.
  Housing construction has almost picked up. Construction of owned houses has been generally flat. Construction of houses for rent has almost picked up. Construction of houses for sale remains at a low level, though it appears to be picking up.

  As for short-term prospects, although the impact of the revised Building Standard Law, particularly on condominiums, is expected to converge, the fact that condominium stock are at a high level should be closely monitored in the future.

Public investment has been generally sluggish.
  Public investment has been generally sluggish.

  Although the amount of orders received for public works during the October-December quarter of 2007 was higher than in the previous year, the contracted amount of public works during the same period was lower than in the previous year. The amount of orders received for public works in January 2008 and the contracted amount of public works in February 2008 were higher than in the previous year.

  As for short-term prospects, public investment is expected to be generally sluggish in view of the budget situations of the national and local governments.

Exports have been increasing moderately.Imports have been flat. The surplus in the trade and services balance has been decreasing.
  Exports have been increasing moderately. By region, exports to Asia have been increasing as a whole. Exports to the U.S. have been decreasing as a whole. Exports to the EU have been flat. As for short-term prospects, the slowdown of the U.S. economy and other factors should be closely monitored.

  Imports have been flat. By region, imports from Asia have been flat. Imports from the U.S. have been gradually increasing. Imports from the EU have been gradually decreasing as a whole.

  As for the international balance of payments, the surplus in trade balance has been decreasing. The deficit in the services account has been flat, thus leading to the surplus of the trade and services balance to decrease.


2. Corporate activities and employment

Production is flat.
  Industrial production is flat, particularly for information-related producer goods etc.

  As for short-term prospects, although downward pressure on production from inventory adjustment is small, export trends should be closely monitored in the future.

Corporate profits have been in a weak tone. Firms' judgment on current business conditions shows a sign of caution. The number of bankrupt companies is on a moderate upward trend.
  According to the Quarterly Financial Statements Statistics of Corporations by Industry, corporate profits during the October-December quarter of 2007 fell by 4.5% in comparison with the previous year, thus posting a decline for the second consecutive quarter despite the fact that sales increased. Broken down by industry, manufacturing industries witnessed a 3.3% decline in profits and non-manufacturing industries witnessed a 5.7% decline in profits. According to the BOJ Tankan, fiscal 2007 sales are expected to post an increase for the fifth consecutive year, and fiscal 2007 current profits are expected to post an increase for the sixth consecutive year.

  The BOJ Tankan shows that firms' judgment on current business conditions shows a sign of caution.

  The number of bankrupt companies is on a moderate upward trend.

The employment situation appears to be pausing while some severe aspects remain.
  The employment improvement appears to be pausing while some severe aspects remain.

  The total unemployment rate, which seemed to have been decreasing earlier, has stopped improving and reached 3.8% in January-the same level it was at in the previous month.

  The number of new job offers has been on a decreasing trend. The effective ratio of job offers to applicants has been on a downward trend. The number of employees has been weakening. Overtime hours worked in the manufacturing industry are decreasing.

  As for the movement of wages, contractual cash earnings have been moving horizontally. The total amount of cash earnings has been weakening.


3. Prices and the financial market

Domestic corporate goods prices have been rising due to increased material prices. Consumer prices have risen only slightly.
   Domestic corporate goods prices have been rising due to increased material prices.

   Consumer prices, in terms of "general, excluding fresh food, petroleum products and other specific components" (referred to as "core core"), have risen only slightly.

  As for short-term prospects, consumer prices (core core) are expected to remain on a slight upward trend.

  However, we need to keep a close watch on the impact of overseas economic movements and crude oil prices on future price movements.

As for stock prices, after rising to the 14,000 yen level, the Nikkei Stock Average dropped to the 11,700 yen level. The yen against the U.S. dollar moved in the direction of appreciation from the 108 yen level to the 97 yen level.