Annual Report on the Japanese Economy and Public Finance 2007

Transcription

1 Annual Report on the Japanese Economy and Public Finance 27 - Toward Higher Productivity Growth - Summary August 27 Cabinet Office Government of Japan

2 Contents Chapter 1 Continued Economic Recovery and Future Prospects... 1 Section 1 Continued Economic Recovery and the Business Cycle Mechanism... 1 Section 2 Financial Markets Remaining Stable after the ending of the Zero Interest Rate environment... 7 Section 3 Movement toward Moderate Price Increases... 8 Section 4 Ongoing Fiscal Soundness... 1 Chapter 2 Increase in Productivity and Corporate Behavior for Future Growth Section 1 Changes of Economic Structure and Macro Productivity Section 2 Japanese Corporate Behavior from the Perspective of Productivity Section 3 IT Usage and Productivity in Japanese Companies Section 4 Issues of Innovation in Japan Chapter 3 Changes in the Labor Market and Their Impacts on the Household Sector Section 1 Diversification of Employment Styles and Its impact on the Household Sector Section 2 Employment system reforms in response to changes in employment environment Section 3 Negotiation process on wage and employment conditions Section 4 The relation between economic growth and disparity This material has been tentatively prepared to explain the Annual Report on the Japanese Economy and Public Finance. For quotation and other purposes, please refer to the text of the Annual Report on the Japanese Economy and Public Finance.

3 Chapter 1 Continued Economic Recovery and Future Prospects Section 1: Continued Economic Recovery and the Business Cycle Mechanism 1. The state of continued economic recovery In the corporate sector, as production continues on an upward trend, sales and profits continue to increase. However, as we enter 27, there are visible signs of a weakening in some areas of production. Despite improvements in profit structures in enterprises overall, there appears to be a lull in improvements in small and medium enterprises (SMEs) in the non-manufacturing industry. (2=1) Figure Changes in Production, Shipment and Inventory Indices Production has been flat after having recorded a new record high Inventories Shipments Production (Forecast) Figure (1) Changes in the Gap between Shipments and Inventories and Production of Information-related Producer Goods Attention needs to be paid to the future prospects of production of information-related producer goods (% points) Production (compared to same month previous year / right scale) Gap between Shipments and Inventories (6-month lead) Notes: 1. Indices of Industrial Production, Ministry of Economy, Trade and Industry. 2. Seasonally adjusted figures (3-month moving average) have been used. 3. Production for June and July 27 have been calculated based on forecast indices Notes: 1. Indices of Industrial Production, Ministry of Economy, Trade and Industry. 2. Gap between Shipments and Inventories (% points) = Change in shipments from previous year - Change in inventories from previous year 3. Gap between Shipments and Inventories was made to precede production by six months. -5 Figure (1) Changes in Profit-to-sales ratio There is a slight sense of a lull in improvements in profit-to-sales ratio for small enterprises in the non-manufacturing industry All industries Large and mediumsized enterprises, Manufacturing Small enterprises, Manufacturing Large and mediumsized enterprises, Non-manufacturing Notes: 1. Financial Statements Statistics of Corporations by Industry, Quarterly,Ministry of Finance. 2. Large and medium-sized enterprises are enterprises with capital of 1 million yen and more, and Small enterprises are enterprises with capital of 1 million yen to less than 1 million yen. 3. Four-quarter moving average. 4. The shadows indicate recession periods. Small enterprises, Non-manufacturing -1 -

4 The effects of unseasonable weather as well as decelerating households income had led to sluggish household consumption since about the middle of 26. However, since the beginning of 27, household consumption has been picking up, boosted by the consumption of spring goods attributable to the effects of a mild winter. The number of employees has continued to be on an increasing trend, and reached a record high. On the other hand, the number of new job offers has turned into decrease since about the summer of 26. Figure Trend in the Sales of Large-Scale Retail Stores Weather factors impacted on the sales of clothing and beverages, etc. (Change from previous year, %) 3. Clothes Other Food & 2. Beverages Sales of large-scale retail stores Notes: 1. Current Survey of Commerce, Ministry of Economy, Trade and Industry 2. Sales of large-scale retail stores is the sum of department store sales and supermarket sales. (Month) Figure Trend in the Number of New Job Offers and the Number of Employees The number of new job offers fluctuates ahead of the number of employees 6. Number of new job offers Number of employees (right scale) Source: Labor Force Survey, Ministry of Internal Affairs and Communications; Employment Referral Statistics, Ministry of Labor, Health and Welfare Note : 3-month moving averages have been taken for the changes in the number of employees and the number of new job offers from the previous year

5 Despite labor market conditions growing firmer, wages remain sluggish. The decline in scheduled cash earnings in the second half of 26 is mainly due to the fall in wages of full-time workers. Several factors are contributed to the decline of wages in a complex manner. Figure Decomposition Analysis of Scheduled Cash Earnings Recently, there has been a significant negative contribution to growth in the contractual cash earnings of full-time workers (Change from previous year, %).8.6 Part-time workers Full-time workers Contribution to contractual cash Contribution to contractual cash.4 earnings earnings Part-time ratio contribution Rate of change in contractual cash earnings I II III IV I II III IV I II III IV I II III IV I (Quarter) Source: Monthly Labour Survey, Ministry of Health, Labour and Welfare Figure Effect of Retiring Regular Workers on Scheduled Cash Earnings Increase in baby boomer retirees contributing to wages being pushed down slightly (Change from previous year, %).6 Rate of change of contractual cash earnings, Rate of change in Provisional calculation of the supposing that all workers withdrew from contractual cash downward effect from the.4 the labor market in the month they reach 6 earnings of full-time second quarter of 27 years old workers compared to previous year Rate of change of contractual cash earnings, supposing that all workers remain in the labor market even after the month they reach 6 years old People born after the second half of 1946 approach the month they reach 6 years old -.6 I II III IV I II III IV I II III IV I II III IV (Quarter) Source: National Census, Labor Force Survey (detailed version), Ministry of Internal Affairs and Communications; General Survey on Wages, Monthly Labour Survey, Basic Survey on Wage Structure, Ministry of Health, Labour and Welfare Figure Effect of Changes in Wages between and within Industries on Scheduled Cash Earnings (Change from previous year, %) 1.4 Decline in wages seen across wide range of industry types Intra-industry wages change factor Medical health care and welfare Wholesale and retail trade Transport Source: Monthly Labour Survey, Ministry of Health, Labour and Welfare -3 - Services Education, learning support (Month)

6 2 The Business Cycle and the Mechanism of Diffusion among Economic Sectors Increasing presence of exports as a driver of business fluctuations. The influence of increases in exports on domestic corporate profits and on production has been increasing since the 199s. [Analysis] Up until the middle of the 199s, exports did not appear to have been leading business investment. Also, exports had not appeared to have been leading domestic demand. Since the middle of the 199s, exports have appeared to be leading business investment, and exports and domestic demand have now appeared to affect each other. Figure Change in the Ratio of Main Components of Demand to GDP Since the bursting of the bubble economy, the exports component has been increasing and is gaining on business investment Source: National Accounts, Cabinet Office Note: 1.Figures at constant prices on SNA68 fixed-based (base year = 199) have been used up until the fourth quarter 1979; figures at constant pices on SNA93 fixed-based (base year = 1995) have been used up until the fourth quarter 1993; and figures at chained prices on 93SNA have been used since the first quarter For this reason, there are divisions in the graph. 2. Shaded areas indicate periods of recession. Figure Elasticity of Corporate Profits to Exports The relationship between exports and corporate earnings became stronger from the 199s (Corporate earnings, change from previous year, %) Business investment Personal consumption (right scale) Exports (Exports, change from previous year, %) Notes: 1. National Accounts, Cabinet Office 2. Corporate earnings is the corporate income of private sector corporations (after dividends have been paid and received). 3. A significant gradient (elasticity) was not observed up to 199, but a significant gradient is estimated for 1991 onward. -4 -

7 There is a possibility that the relationship that increased corporate earnings leads to increased labor costs has been weakening since the 198s. However, it should be noted that, in the current phase of economic recovery, good conditions in the corporate sector is linked to consumption through increases in the number of employees and increases in wages, and so a flow-on to the household sector was observed. As improvement in the supply and demand of the macro economy continues, there is a chance that flow-on from corporate profits to labor costs (income of the household sector) would appear. Figure Changes in Timing Correlation of Operating Profit and Labor Costs [Analysis] Durable goods that are considered to have high income elasticity seem to have relatively higher elasticity to worker s wage. Semi-durable goods and non-durable goods, which are viewed to have low elasticity to income, might have relatively higher elasticity with respect to employment. Compared with goods, services have relatively lower elasticity to income. During the current phase of economic recovery, which has had relatively moderate increase in wage (but high increase in employment), durable goods supposedly having higher elasticity to income have been sluggish. Furthermore, high composition ratio of service consumption of lower elasticity to income than durable goods, etc. in the total expenditure might lead to have weakened the diffusion of increased income to consumption. Figure Macro Income Elasticity of Consumption by Type of Goods (Change from previous year, %) (Change from previous year, %) Durable goods have high elasticity, especially against wages; and semi-durable goods (Elasticity) and non-durable goods have high elasticity against employment *** 1.6 Macro income elasticity ***.52 The relationship between operating profit and labor cost weakens from the 198s Labor cost (right scale) Operating profit 1.29***.45***.86*** Durable goods Semi-durable goods Non-durable goods Services Wage elasticity contribution.14***.14*** 1 (Timing correlation coefficient).6 <197s and before> Labor cost lagged 2 quarters.5 behind operating profit, and there was a high correlation (Quarter) Lead <= Time difference between labor cost and operating profit => Lag Notes: 1. Quarterly Financial Statements Statistics of Corporations by Industry, Ministry of Finance 2. Changes from the previous year, and the associated timing correlation in all sizes and all industries. Employment elasticity contribution.5***.23**.28*** Notes: 1. National Accounts, Cabinet Office; Labor Force Survey, Ministry of Internal Affairs and Communications 2. Imputed rent has been excluded from services. 3. The estimation period is from the first quarter of 1995 to the first quarter of 26. Elasticity has been estimated, net of the effects of consumption tax. *, ** and *** denote a significance level of 1%, 5% and 1% respectively <198s and after> The lead-lag relationship weakens Decline in correlation and slip in time difference

8 Figure Comparison of Main Indicator Growth Rates with Past Periods of Economic Recovery In spite of the length of this current period of economic recovery, it is often pointed out that people actually have a little sense of the recovery. Background of that people s feeling might be related to a number of factors, including a moderate increase in the real rate of growth; sluggish growth in nominal values such as income and earnings due to having been in deflation; and disparity among firms in terms of corporate profits and the weakness of the flow-on to the household sector Difficult to feel any real sense of economic recovery compared to the "Izanagi boom" and the "bubble economy" (1) Comparison of the nominal economic growth rate (2) Comparison of the real economic growth rate Izanagi boom (Oct Jul 197) (3) Comparison of the rate of increase in consumer prices 5.3 Izanagi boom 7.3 Bubble 1 economy (Nov Feb 1991) 1.2 Bubble economy.9 Current phase of economic recovery (Feb 22-) -.2% Current phase of economic recovery Izanagi boom 12.2 Izanagi boom 5.4 Bubble 1 economy Current phase of economic recovery (4) Comparison of the rate of increase in nominal wages Bubble economy Current phase of economic recovery Notes: 1. The names used for each of the economic periods are common names, not official names. The names have been sourced from the Japanese Economy 24, Cabinet Office. 2. The rate of increase in consumer prices (CPI) in graph (3) is general, excluding imputed rent. The nominal wages in the Izanagi boom in graph (4) excludes the service industry. 3. The rate of increase in CPI in the bubble economy in graph (3) excludes the effects resulting from the increase in consumption tax. 4. In graphs (3) and (4), since past seasonally adjusted series cannot be obtained, calculations have been made for all periods using the average growth since the same month of the previous year. 5. For the current period of economic recovery, the GDP growth rate covers the period from Jan-Mar 22 to Jan-Mar 27; and wages and CPI cover the period from January 22 to May National Accounts, Cabinet Office; Consumer Price Index, Ministry of Internal Affairs and Communications; Monthly Labour Survey, Ministry of Health, Labour and Welfare.

9 Section 2 Financial Markets Remaining Stable after the ending of the Zero Interest Rate environment After the ending of the zero interest rate environment, long-term interest rates have fluctuated within a fixed range. Bank loans have increased slowly, mainly due to the demand for working capital of SMEs. Stock prices have continued an upward trend after a period of adjustment. In the foreign exchange market, yen have continued to depreciate against a backdrop of differences in interest rates Figure Changes in Long-Term Interest Rates Long-term interest rates have moved between 1.6% and 1.8% March 9 July 14 August 25 February 21 Terminating of the End of the zero interest Rebasing of the CPI Raising of the policy interest quantitative easing policy rate environment rate target to.5% United States (right scale) 5.2 (Year-on-year changes, %) SMEs Loan growth rate Japan Notes: 1. Bloomberg 2. 1-year government bond yields have been used for both Japan and the United States. Local governments Housing loans Others Large and middle-sized enterprises I II III I IIIII I II III I II III I IIIII I II III I II Figure Trends in Bank Loans Bank loans increasing slowly (1) Changes in private banks outstanding loans by borrower (2) Breakdown of loans to corporations classified by purpose (Quarter) (Year-on-year changes, %) 4 Source: Loans and Discounts Outstanding by Sector, Bank of Japan Notes:1. Second quarter figures for 27 have been created using the figures for May The housing loans figure in graph (1) for the second quarter 27 is the loans to individuals which includes loans other than housing Working capital Loans to corporations Equipment funds I II III I II III I II III I II III IIIIII I II III III (Month) (Quarter) -7 -

10 Section 3 Movement toward Moderate Price Increases Movements toward price increases continue to be moderate. There is downward pressure on goods prices amid global competition. If service prices increase while realizing wage increase, steady increase in prices is expected in Japanese economy. [Analysis] Compared to the United States and the EU, service prices do not contribute to an increase in the overall level of prices in Japan. In view of the low price elasticity and high income elasticity of the demand for services, if an increase in service prices is attributed to an increase in income in the overall economy due to the economic recovery, it is anticipated that prices will steadily increase in Japanese economy. Figure Components of CPI in Japan, the US and the EU (Change from previous year, %) 5. Japan Japanese service prices are different to other countries United States European Union (Q) (Y) Source: Ministry of Internal Affairs and Communications, Bureau of Labor Statistics, Eurostat Note: US and EU public utility charges are electricity, gas, water, public transportation, postal service, telephone service and tobacco. The figures for food in the US include food eaten out. Public utility charges Services core Petroleum products Food Goods core Total Figure Change in Services Prices and Wages in Japan, the US and the EU In Japan, the change in services prices remains close to zero during the phase of decreasing wages (Change from previous year, %) 5. Japan United States European Union Wages Services industry CPI General services 1. CPI services Wages Private sector services HICP services Wages Private sector services (Q) (Y) Source: Consumer Price Index, Ministry of Internal Affairs and Communications; Monthly Labour Survey, Ministry of Health, Labour and Welfare; Consumer Price Indexes, Current Employment Statistics, United States Bureau of Labor Statistics; Harmonised Indices of Consumer Prices, Labour Cost Index, Eurosta Notes 1. Differences attributable to the introduction of consumption tax have been corrected for the Japanese general services prices. Also, excludes mobile telephone charges which has been included in general services since US and EU services prices exclude electricity, gas, water, public transportation, postal services and telephone services. -8 -

11 Average land price, nationwide, rose for the first time in 16 years. While land price continued to fall in local areas, it increased in excess of 3 to 4 percent in some inner-city metropolitan areas. It is important to ascertain whether asset prices are backed by reasonable and expected growth rates. [Analysis] A positive correlation is observed between the volatility of land prices and the move-in excess ratio. The larger the outward flow of population, the lower the demand for land in the area, and this is linked to the continuous decline in land prices. Figure Volatility of Land Prices and Move-In Excess Ratio The larger the outward flow of population, the greater the decline in land prices (1) Assuming residential district land prices are used (2) Assuming commercial district land prices are used (Land price volatility, %) y = x R 2 = (Move-in excess ratio, %) (Land price volatility, %) y = x R 2 = (Move-in excess ratio, %) Notes: 1. Land Price Publication, Ministry of Land, Infrastructure and Transport; Report on the Internal Migration in Japan Derived from the Basic Resident Registers, Ministry of Internal Affairs and Communications 2. The move-in excess ratio is the ratio of the net inward flow of migrants (inward flow of migrants minus the outward flow of migrants) to the population of Japanese people in the particular region as of October 1. A negative ratio indicates an excess outward flow of migrants. 3. Graphs (1) and (2) plot the data for each prefecture. 4. Data from 27 has been used for land price volatility, and data from 26 has been used for move-in excess ratios. Although the rate of return on rental office space is tending to increase in the ward districts of Tokyo, the rate is declining in some areas. Figure Rate of Return on Rental Office Space and Factor Analysis In some districts, the rate of return on rental office space is declining (1) Rate of return on rental office space 6 5 Aoyama 4 Ward districts of Tokyo 3 2 Ginza Notes: 1. MTB-IKOMA Real Estate Investment Index, Ikoma Data Service System 2. Income return (net operating income / beginning asset price) based on the real estate investment indices has been used for the rate of return on rental office space. -9 -

12 Section 4 Ongoing Fiscal Soundness The primary balance of the central and local governments is steadily improving. Efforts to cut expenditure as well as economic recovery have both contributed to improving the fiscal balance since FY 23. Figure Cyclical and Structural Fiscal Balance of Central and Local Governments Structural primary balance contributes to the improvement of the overall balance. (%, relative to nominal GDP) Fiscal balance Structural primary balance Interest payment expenses (net) Structural fiscal balance Estimates Cyclical fiscal balance (Fiscal ear) Figure Trends in Revenue and Expenditure Change in revenue from the previous fiscal year (central and local government) relative to nominal GDP (1) Trends in revenue Revenue has increased since FY 24 Estimates Total revenue (Fiscal year) (2) Trends in expenditure Reductions in public investment controls expenditure Change in expenditure from the previous fiscal year (national, local) relative to nominal GDP Social security Estimates Public investment (Fiscal year) Notes: 1. National Accounts, Cabinet Office. Actual figures are utilized until FY 25, and estimated figures are utilized from FY 26 and onwards. 2. The effect of current transfers between central and local governments was eliminated. 3. In Graph 1-4-1, Fiscal balance = Cyclical fiscal balance + Structural primary balance + Interest payment expenses (net). The GDP gap is assumed to be zero. 4. In Graph (1), only total revenue has been displayed for FY 26 and FY 27. In Graph (2), Other expenditure factors include subsidies to private enterprises, capital transfers (net), and consumption of fixed capital (deduction), etc. 5. The value for FY 1998 does not include those (about 27 trillion yen) of the Japanese National Railways and forestry that were transferred to the general account. The values for FY 2 and FY 21 include the tax revenue increase of about 4.5 trillion yen and about 3.7 trillion yen, respectively, resulting from the maturity of postal savings. The value for FY 26 does not include the purchase price of the land transferred to the Japan Expressway Holding and Debt Repayment Agency from the four highway-related public corporations. The value for FY 26 does not include those transferred from the Fiscal Loan Fund Special Account to the National Debt Consolidation Fund Special Account