Monthly Economic ReportExecutive Summary( May 2012 )

(Provisional translation)

(Assessment of the current state of the Japanese economy)

The Japanese economy is on the way to recovery at a moderate pace, reflecting emerging demand for reconstruction, while difficulties continue to prevail.

Industrial production is still picking up slowly. Exports show signs of picking up.
Corporate profits show signs of leveling off, although they have decreased. Business investment is picking up recently.
Firms' judgment on current business conditions shows a small improvement as a whole, and that for large manufactures stops deteriorating.
The employment situation is picking up, although it still remains severe partly due to the earthquake disaster.
Private consumption is increasing at a moderate pace.
Recent price developments indicate that the Japanese economy is in a mild deflationary phase.

Concerning short-term prospects, reflecting emerging demand for reconstruction, movements toward sound economic recovery in the Japanese economy are expected to take hold. However, there are downside risks that could stem from sharp fluctuations in the financial and markets, and further slowing down of overseas economies caused by the growing uncertainty about the prospects of the Eurozone debt crisis. It should also be noted that there is still a risk of constraints of electric power supply, of oil price hikes, and the adverse effects of deflation on the economy.

(Policy stance)

The Government, considering the downside risks stemming from the European sovereign debt crises and others, will make its best effort to avoid the slowdown of the economy, in addition to working through the reconstruction from the Great Earthquake. The Government will also decisively work to overcome deflation and make an utmost effort to prevent the economy from falling into vicious cycle between yen appreciation and deflation.

To this end, the Government swiftly implements the policies included in the FY2011 supplementary budgets, and steadily executes the FY2012 budget.

The Government will work together with the Bank of Japan, aiming at quickly realizing stable price increase. Toward the exit from deflation, the Government expects that the Bank of Japan will conduct appropriate and decisive monetary policy management while working closely with the Government.

The Bank of Japan decided to increase the total size of the Asset Purchase Program on April 27th.

Detailed explanations

1. Demand trends such as consumption and investment

Real GDP (gross domestic product) in the January-March quarter of 2012 increased by 1.0% on a quarterly basis (at an annual rate of 4.1%), posting positive growth for the third consecutive quarter. Nominal GDP increased by 1.0% on a quarterly basis, posting positive growth for the first time in two quarters.

Private consumption is increasing at a moderate pace.

Private consumption is increasing at a moderate pace partly due to the effects of policy measures such as the subsidies program for the purchase of eco-friendly cars. The consumer confidence index is picking up. Real income of employees holds firm. The Synthetic Consumption Index, which synthesizes demand-side statistics (Family Income and Expenditure Survey, etc.) and supply-side statistics (Indices of Industrial Producer’s Shipments, etc.), increased in March in comparison to February, while it also increased in terms of the three-month moving average.

As for short-term prospects, private consumption is expected to continuously show a moderate upward trend, partly due to the effects of policy measures, while employment and income environments remain stable. However, attention should be given to constraints on electric power supply.

Business investment is picking up recently.

Business investment is picking up recently. The Quarterly Financial Statements Statistics of Corporations by Industry, demand-side statistics, show that business investment decreased in the July-September quarter of 2011, before increasing in the October-December quarter of 2011. Capital goods Shipments, supply-side statistics, have been almost flat.

According to the Short-Term Business Survey of Enterprises in Japan (Tankan) by the Bank of Japan, planned business investment in the fiscal year 2012 is expected to increase for the second consecutive year for manufacturers, and that for non-manufacturers is expected to decrease for the fifth consecutive year, thus that for all industries is expected to decrease for the first time in two years. Sense of excessive capital stock is almost flat. According to the Business Outlook Survey by the Ministry of Finance and the Cabinet Office, planned business investment in the fiscal year 2012 is expected to increase for large manufacturers, and that for large non-manufacturers is expected to decrease. The figures for Orders Received for Machinery, a leading indicator, are increasing moderately.

As for short-term prospects, business investment is expected to pick up, partly due to demand from post-earthquake disaster reconstruction, as corporate profits are picking up.

Housing construction has been showing movements of picking up recently.

The total number of sales of condominiums in the Tokyo metropolitan area has been showing movements of picking up.

As for short-term prospects, housing construction is expected to pick up, partly due to reconstruction demand, while the employment and income environments remain stable. However, the supply-demand situations of construction workers should be closely monitored.

Public investment has shown steady performance.

Public investment has shown steady performance due to the effect of the FY 2011 supplementary budget, etc.

The amount of contracted public works in April 2012 and the amount of public works orders received in March 2012 were higher than in the previous year, due to the effects of the FY2011 supplementary budget, etc.

As for short-term prospects, a boosting effect by the supplementary budget continues to be expected.

Exports are showing movements of picking up. Imports have been flat. The deficits of the balance of goods and services have been flat.

Exports as a whole show signs of picking up although the economy in Europe continues to stagnate. By region, exports to Asia are showing movements of picking up. Exports to the U.S. have been increasing. Exports to the EU are leveling off. As for short-term prospects, exports are expected to pick up, reflecting the recovery of the U.S. economy, etc., although it should be also noted that there are downside risks of overseas economies, and so on.

Imports have been flat. By region, imports from Asia, the U.S. and the EU have been flat. As for short-term prospects, imports are expected to remain broadly flat for the time being.

The deficits of the balance of goods and services have been unchanged. The deficit in the balance of trade in March increased, as export values have increased and import values have substantially increased. The deficit in the services trade has been flat.

2.Corporate activities and employment

Industrial production is picking up slowly.

Industrial production is picking up slowly, mainly because automobile sales in Japan and overseas have shown steady performance.

As for short-term prospects, production is expected to continue picking up, reflecting the increase in domestic demand and improvement of supply-demand conditions of electronic components, etc. At the same time, attention should be given to possible downside risks of overseas economies, constraints on electric power supply, and so on.

Also, the Survey of Production Forecasts expects an increase in April and a decrease in May.

Corporate profits show signs of leveling off, although they have decreased. Firms' judgment on current business conditions shows a small improvement as a whole, and that for large manufacturers stops deteriorating. The number of corporate bankruptcies is almost flat.

According to the Quarterly Financial Statements Statistics of Corporations by Industry, corporate profits during the October-December quarter of 2011 decreased by 10.3% in comparison with the previous year, thus posting a decline for the third consecutive quarter, due to a decrease in sales. Seasonally adjusted changes from the previous quarter showed a decrease of 2.1%. By type of industry, profits in the manufacturing industry decreased by 21.5%, and profits in the non-manufacturing industry also decreased by 4.3%. According to the BOJ Tankan (March survey), sales in the fiscal year 2012 are expected to increase for the third consecutive year, and current profits in the fiscal year 2012 are expected to increase for the first time in two years.

The Tankan (March survey) also reveals that firms’ judgment on current business conditions shows a small improvement. Large manufacturers’ judgment on current business conditions was flat, that for large non-manufacturers improved for the third consecutive quarter, that for small manufacturers deteriorated for the first time in three quarters, and that for small non-manufacturers improved for the third consecutive quarter.

The number of corporate bankruptcies is almost flat, under the condition that the impact of the earthquake disaster still remains.

The employment situation is picking up, although it still remains severe partly due to the earthquake disaster.

The total unemployment rate stood at 4.5% in March, the same level as the previous month. The total unemployment rate of those aged 15 to 24 was 8.6%, a decrease of 0.6 percentage points from the previous month. The labor force, the number of employed persons, and the number of unemployed persons have been decreasing. The number of employees has been showing movements of picking up recently.

The effective ratio of job offers to applicants has been rising because of an increase in the number of new job offers, etc. Overtime hours worked in the manufacturing industry have been showing movements of picking up.

As for the movement of wages, the contractual cash earnings and the total cash earnings are moving steadily.

As for short-term prospects, the employment situation is expected to pick up although it still remains severe.

3.Prices and the financial market

Domestic corporate goods prices have been rising at a moderate pace recently. Consumer prices have been flat recently.

Domestic corporate goods prices have been rising at a moderate pace recently.

Consumer prices, in terms of “general, excluding fresh food, petroleum products and other specific components” (referred to as "core core"), have been flat recently.

As for short-term prospects, consumer prices (core core) are expected to remain flat for the time being.

Consumer prices (core core) continued to decline on a year-on-year basis. Taken together, these movements show that the Japanese economy is in a mild deflationary phase, although the tempo of deflation has been slower.

As for stock prices, the Nikkei Stock Average is declining from the 9,600-yen level to the 8,800-yen level. The yen against the U.S. dollar is moving in the direction of appreciation from the 81-yen level to the 80-yen level.

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