Monthly Report of Prospects for Japan's Economy January 11 Macro Economic Research Centre Economics Department http://www.jri.co.jp/thinktank/research/ This report is the English version of the December 1 issue of the original Japanese version.
Current situation of Japan s economy The economic activity has been weakening Japan's economic activity has been weakening since around last summer, mainly in the corporate sector. The leading index in the Business Conditions Indices peaked in April 1 and then turned downwards. Also, the coincident index declined in September, for the first time in 18 months. The main reason for the weakening appears to be a decrease in industrial production. Industrial production declined in October 1, the fifth consecutive month-on-month decline. This trend is against the background that consumption expenditure on durable consumer goods and exports to Asia, which had been driving forces in the economy, have been decreasing. As for domestic demand, its recovery in earnest has yet to materialise. Although machinery orders and building construction starts continue a moderate recovery, their levels are considerably lower than those before the second half of 8. The pace of recovery in the number of employees and the total cash earnings is still slow, although their declines have been stopped. (CY5=1, s.a.) 1 15 14 Industrial Inventory Ratio Index 13 1 11 1 9 8 Industrial Production Index 7 1 3 4 5 7 8 9 1 (CY5=1, s.a., 3-m.m.a.) 1 11 1 9 8 7 5 4 Index for Machinery Orders (Real, Private, excl. Electric Power and Shipbuilding) Index for Building Construction Starts (Floor Area, Private, Non-dwelling) 1 3 4 5 7 8 9 1 (Y/M) Figure 1 Main Indicators for Japan's Economy (CY5=1, s.a., 3-m.m.a.) 14 1 1 98 Household Consumption Expenditure Index (Real, Households with or more household members, "Family Income and Household Survey") Retail Sales Index (Real) 9 1 3 4 5 7 8 9 1(Y/M) (CY5=1, s.a., 3-m.m.a.) 13 1 Real Exports Index 11 1 9 8 Real Imports Index 7 1 3 4 5 7 8 9 1 (Y/M) Source: The Ministry of Economy, Trade and Industry; The Ministry of Internal Affairs and Communications; The Cabinet Office; The Ministry of Land, Infrastructure and Transport; The Bank of Japan. Note 1: Indices of industrial production and industrial inventory ratio are seasonally adjusted on a monthly basis. Others are calculated as seasonally adjusted and 3-month moving averages. : The industrial production index in November and December 1 is based on METI forecasts. 3: Shaded areas indicate periods of recession according to the Cabinet Office. (Y/M) - 1 - Monthly Report of Prospects for Japan's Economy January 11
Industrial production Has been weakening as a whole Industrial production declined in October last year by 1.8 per cent on the previous month, the fifth successive monthly decline, and the pace of decline tended to accelerate. This was against the background that demand for automobiles had decreased sharply due to the end of subsidies for the purchase of eco-friendly cars early last September. The actual result in October (minus 1.8 per cent) was better than the forecast figure (minus 3.4 per cent). The main reason for this was a significant upward revision in the production of information and communication equipment. Rushed demand ahead of a 5 per cent reduction in the "eco points" for household appliances from December onwards expanded the production of flat-panel-display TVs and air-conditioners sharply and made up partly for the decrease in the production of automobiles. The production forecast for November and December 1 was for two consecutive monthly increases. Viewed by industry, production of flatpanel-display TVs will have maintained its accelerated pace through December. The production of general machinery is also estimated to have increased during that period, reflecting a picking-up in business fixed investment at home and abroad. However, as the positive factors are limited to only a certain few of the industries, industrial production as a whole is currently on a weakening trend. Figure -1 Industrial Production Index <seasonally adjusted> (CY5=1) 35 11 3 5 +7. +1.5-1.8 1 Industrial +5.9 9 15 production index +.5 +5.3-1.7 1 (right scale) 8 5 7 5 Revision ratio in 1 production forecast 15 index (left scale) 5 4 8 9 1 (Y/M) Source: The Ministry of Economy, Trade and Industry. Note 1: The dotted line indicates the production forecast for November and December 1. : The short horizontal line indicates the average in each quarter and the figure shows the quarter-onquarter % change. Figure - Production Forecast by Industry <% change over 3 months before> <December, 1> 1 8 4 4 8 Steel and steel products Nonferrous metals and products Miscellaneous metal products General machinery Electrical machinery Source: The Ministry of Economy, Trade and Industry. - - Information and communication equipment Electronic parts and devices Transportation equipment Chemical products Paper products, pulp Others 8 4 4 Figure -3 Revision Ratio to Production Forecast by Industry Steel and steel products <November, 1> Nonferrous metals and products Miscellaneous metal products General machinery Electrical machinery Information and communication equipment Electronic parts and devices Transportation equipment Chemical products Paper products, pulp Others Upward revision Source: The Ministry of Economy, Trade and Industry. Monthly Report of Prospects for Japan's Economy January 11
Exports - Its role as driving force for the economy has been decreasing Japan's exports to Asia have been weakening. In addition, the pace of increase in exports to the US and European countries has shown a sign of decelerating. Looking ahead, it is expected that exports to the US and European countries will turn to a weakening trend, as the driving forces in both the public and private sectors in these countries decrease. The tightening stance in the public sector will be strengthened due to a further reduction of public debt. Also, the adjustment in the employment and housing markets in the private sector will be prolonged. It is also predicted that the rapid recovery in exports to emerging countries will not be able to be counted on for the moment, as the effects of economic measures fade away and the production adjustment in the electronic product industry and other industries continues. However, in contrast to the US and European economies, emerging economies are projected to continue basically firm economic growth that is led mainly by domestic demand. Accordingly, it is expected that Japan's exports will start to recover moderately, driven chiefly by exports to emerging economies, from the second half of 11 onwards, when the latest negative factors in emerging countries would be resolved. Figure 3-1 Japan's Real Exports by Region <seasonally adjusted> (CY7=1) 1 1 8 世界 World <1> その他 Others <17> アジア Asia <55> EU<1> EU7 <1> 米国 US <1> 4 7 8 9 1 (Y/M) of The Ministry of Finance, The Bank of Japan. Note 1: The figures in angle brackets in the legend indicate the share of each region in total nominal exports of Japan in FY9. : Others: Middle Eastern countries, South American countries, Russia and so on. Figure 3- Japan's Real Exports to China by Commodity <seasonally adjusted, quarter-on-quarter % change> Total value of exports 1 (annualised, right scale) 18 15 1 その他 Others 輸送機械 Transport equipment 9 電子テ ハ イス Electronic devices 一般機械 General machinery 生産財 Producer goods 3 前期比 Total to ( 左目盛 China )(left scale) 3 7 8 9 1 of The Ministry of Finance, The Bank of Japan. - 3-18 1 14 1 1 8 4 Figure 3-3 Overseas Demand and Japan's Real Exports (% points) 1 Forecast 1 1 9 8 3 4 7 5 7 5 7 8 9 1 輸出 Real ( 実質財サ 右目盛 exports (goods and ) services, right scale) Overseas supply and demand conditions for 海外での製商品需給判断 DI( 左目盛 ) products (DI, left scale) Source: The Bank of Japan, The Cabinet Office. Note: DI = The diffusion index of "excess demand" minus "excess supply". Monthly Report of Prospects for Japan's Economy January 11
The strong yen - A considerable negative effect mainly on the processing manufacturing The effects of the yen appreciation on the economy are considered to be materialised through the following three routes. (1) Prices - The appreciation of the yen causes foreign-exchange losses in the settlement of exports and profits in imports. While the processing manufacturing which has a high degree of export dependence suffers a downswing in its profits, the manufacturing of basic materials which has a high level of import ratio and nonmanufacturing enjoy an upswing. In the aggregate, the yen appreciation brings about a positive effect on net profits, because foreign-exchange profits exceed losses. () Volume - The rise of the yen pushes down export volume and pushes up import volume, with a time lag of half a year to two years between the change in the exchange rate and the change in volume. Accordingly, net exports are pushed down. (3) Business planning - A continuing highly appreciated level of the exchange rate of the yen is expected to accelerate a shift of production strongholds mainly of manufacturing from domestic sites to overseas ones. As a result, the shift will reduce domestic business fixed investment and employment. Taking all these effects into consideration, while the positive effects are expected in the short term, the negative effects will be getting more serious on domestic business fixed investment and employment in the medium and long term. In total, this situation is expected to have a negative effect on the economy as a whole. Figure 4-1 The Estimated Effect of the Yen Appreciation on Operating Profits of Manufacturing <the second half of FY1, Yen89.44/Dollar 8.5/Dollar> Forecast Change caused by <Tankan> yen appreciation billion yen billion yen ratio,% Motor vehicles 15-39 -8.8 Shipbuilding & Heavy machinery 1-1 -49.3 Electrical machinery 1,4-37 -9.5 Iron & Steel 39-9 -1.9 General machinery 1, - -1.9 Ceramics, Stone & clay products 7 - -7.9 Chemicals 1,41-8 -5.5 Food & beverages 81 9 11. Nonferrous metals 1 9 7.4 Petroleum & Coal 8 9 3. of The Bank of Japan, The Ministry of Finance, The Ministry of Economy, Trade and Industry. Figure 4- Breakdown of Japan's Trade by Settlement Currency <the first half of 1> 35 3 5 15 1 5 Exports Imports その他 Others 円建て yen-denominated ドル建て dollar-denominated Source: The Japan Research Institute, Ltd. based on the data of The Ministry of Finance. - 4 - Figure 4-3 The Effect of Change in the Exchange Rate of the Yen on Real GDP Growth <contributions to year-on-year % change> (% points).4....4..8 輸入要因 Imports factor 輸出要因 Exports factor Case 1: A Levelling off of the exchange rate Case : Continued appreciation (Note) 8 9 1 11 Note: At the same pace as that in past three years. of The Ministry of Finance, and so on. Monthly Report of Prospects for Japan's Economy January 11
TV sales - Reactionary fall expected from early 11 onwards The effects of economic measures, which have been bolstering economic activity thus far, are predicted to fade away, and especially, a significant reactionary fall is expected in the sales of TVs. While latent demand for TVs is estimated at about ten million units annually, the latest sales have been exceeding double the underlying demand. A large part of the excessive sales is considered to be the rushed demand met in advance for new TVs for digital broadcasting. It is projected that the demand for around two and a half years will be met in advance, ahead of the end of analogue broadcasting in July 11. Therefore, the reactionary decline that is expected after the change to TVs for digital broadcasting is complete will be sharp and considerable. Accordingly, the downward pressure on private consumption expenditure will be intensified from the early part of this year onwards. In addition, it is predicted that the sluggish situation in TV sales will be prolonged. This is because half of the TVs which are owned by domestic consumers will be new TVs bought within three years as of the end of June 11. Meanwhile, the Japanese government has taken additional economic measures in succession since last September, responding to the rapid appreciation of the yen, for example. However, the boosting effect of these measures will be limited because their scale is not so large. Figure 5-1 TV Sales <seasonally adjusted, annualised> Figure 5- Periods of TV Ownership <as of the end of June 11> Figure 5-3 Nominal Consumption Expenditure and the CPI of TVs (1, units) 3,5 Demand met in 3, advance for,5 new TVs for digital, broadcasting 1,5 1, 5 8 9 1 11 of The Cabinet Office, The Ministry of Internal Affairs and Communications, Japan Electronics and Information Technology Industries Association (JEITA), National Institute of Population and Social Security Research. Less than one year 4% Four years or more 48% One to two years 17% Two to three years 11% of Figure 5-1 on this page. - 5-5 4 3 The CPI of TVs (y/y %, right scale) 1 Nominal consumption expenditure of TVs (annualised, left scale) 7 8 9 1 11 of The Ministry of Internal Affairs and Communications, and so on. 4 Monthly Report of Prospects for Japan's Economy January 11 15 5 3 35
The CPI change rate - To stay in negative territory; deflationary trend prolonging It is expected that the pace of the year-on-year decrease in the Consumer Price Index excluding fresh food (the core CPI) will decelerate gradually. However, it is projected that the year-on-year change rate of the index will continue to stay in negative territory, because the estimated supply-demand gap is still a considerable minus figure, minus 3.5 per cent in the July-September quarter 1. This trend of falling prices will continue to be seen in a wide range of products and services, including household appliances and clothing, which will put downward pressure on corporate profits. The long-range estimate shows that the time when the supply-demand gap narrows to zero would be the end of 1 at the earliest. As long as the gap exists, the downward pressure on prices is also expected to remain. Meanwhile, reflecting the rise in resource prices, the terms of trade for Japan ("export deflator / import deflator") have tended to be worsening. The difference in the amount of trade losses from a year earlier, which means the change in the amount of income outflow to mainly resourcerich countries, increased to trillion yen in the July-September period last year. This trend is expected to be a weighing-down factor on corporate profits as well, under the circumstances where enterprises find it difficult to pass the increased costs on to the prices of their final products. Figure -1 Change in Consumer Price Index on CY5-base <year-on-year, excluding fresh food> 3 1 1 3 8 9 1 11 Household appliances, エネルキ ー Fuel and light 家具 家電 furniture たばこ Cigarettes 高校授業料 High school fees CPI excluding fresh food その他 Others 生鮮除く (y/y % change) of The Ministry of Internal Affairs and Communications. Figure - Long-range Estimate of Supply- Demand Gap Shown as a Percentage of GDP CY1 CY14 4 8 1 5 1 Based on these assumptions: potential output is 1%, and 3% continued 成長 annual GDP growth rate of 3% % continued 成長 annual GDP growth rate of % of The Cabinet Office. - - 3 1 1 Figure -3 The Effect of the Rise in Resource Prices The terms of trade (shown as "export deflator / import deflator", right scale) worsen The difference in the amount of trade losses from a year earlier on a quarterly basis (left scale) 7 8 9 1 (CY7=1) 11 1 9 8 7 Income outflow 5 4 of The Cabinet Office. Monthly Report of Prospects for Japan's Economy January 11
Business fixed investment - Its stagnation is worryingly expected to be prolonged Business fixed investment is on a moderate recovery path at present. Machinery orders, chiefly those from manufacturing, have been increasing modestly. Building construction starts also have been picking up mildly, led by redevelopment projects in large city areas. In spite of their recent recovery, these are still at a low level, which is 3 to 4 per cent lower than that of the latest peak. Looking ahead, it seems to be too early to judge that the recent recovery trend will last. The forecast of enterprises shown in the recent Tankan Survey indicates that business fixed investment will continue to stagnate in FY1 to March 11 as well. The planned amount of business fixed investment during FY1 in large enterprises is still about per cent lower than that of the latest peak, although the rate of increase on FY9 is forecast to be 4.9 per cent. This weak trend appears to reflect a lag in improving the heightened sense of excess capacity. The level of capacity utilisation in manufacturing is still about 15 per cent lower than that of the latest peak, which suggests that enterprises still hold excess capacity. Further, the stagnation of business fixed investment is, worryingly, expected to be prolonged in the medium term as well. The survey shows that many Japanese enterprises plan to curb domestic investment and accelerate a shift of business fixed investment from domestic to overseas, amid a widening difference between the growth rates of domestic and overseas economies. The survey also indicates a very cautious attitude of enterprises towards business fixed investment for three years to come, mainly in manufacturing. Figure 7-1 Machinery Orders by Orderer <seasonally adjusted, annualised> 8 7 5 Nonmanufacturing 4 (excluding electric 非製造業 power and ( shipbuilding) 除く船舶 電力 ) 3 製造業 Manufacturing 7 8 9 1 (Y/M) Source: The Cabinet Office. Note: The short horizontal line indicates the forecast of orders in Q4 1. Figure 7- Revisions to the Planned Amount of Business Fixed Investment <large enterprises> 3 The planned 34 amount as of 3 September 1 3 8 4 5 7 8 9 1 (FY) Source: The Bank of Japan. Note: Including software investment, and excluding land purchase expenses. - 7 - Figure 7-3 Plan for Future Production of Japanese Enterprises 拡大 Expansion 維持 No change 縮小 Reduction 未定 Not yet planned Domestic 13.1 4.9 13.3 Overseas 55.7 13. 4 8 1 Source: The Cabinet Office, "Annual Survey of Corporate Behaviour in FY9". Monthly Report of Prospects for Japan's Economy January 11
Compensation for employees - The rate of increase is expected to decelerate It is predicted that employment environments will be more harsh gradually, as Japanese enterprises lower their levels of economic activities. In particular, the sluggish employment situation will likely be protracted. It is analysed that there is a moderate positive correlation between the average monthly working hours and the number of employees. Based on this analysis, the latest level of working hours is still at a low level. Accordingly, the situation where it is hard for enterprises to start to increase employment will be prolonged, as long as there is still room for enterprises to allow the average monthly working hours of employees to increase. It is also expected that the total cash earnings per employee will continue a low rate of increase. Although overtime payments would continue to increase, reflecting the rise in overtime work, the rate of increase in regular payments will remain modest because the attitude of enterprises to curtail personnel expenses as a whole will continue. The pace of rises in bonuses will also be limited, although the worst of the bonus payment situation is over. In total, it is highly likely that the rate of increase in compensation of employees in the aggregate will decelerate gradually, reflecting the stagnation of the number of employees as well as the low rate of increase in the total cash earnings per employee. Figure 8-1 The Ratio of Enterprises that Carried Out an Employment Adjustment 5 4 3 1 1 3 4 5 7 8 9 1 of The Ministry of Health, Labour and Welfare. Note 1: This survey was conducted on 3, enterprises with 3 or more employees early in August 1. : Shaded areas indicate periods of recession. Figure 8- Correlation between Working Hours and the Number of Employees (average monthly working hours, hours) 175 17 15 1 155 15 145 Q 1 14 1 1 3 4 5 (the number of employees, y/y %) of The Ministry of Internal Affairs and Communications, The Ministry of Health, Labour and Welfare. - 8 - Figure 8-3 for Change in Compensation for Employees <year-on-year % change> 1 1 The total cash earnings 賃金 per employee 3 The number of 雇用者数 4 employees 5 Compensation for 雇用者報酬 employees 7 8 9 1 11 1 Source: The Cabinet Office, The Ministry of Internal Affairs and Communications, The Ministry of Health, Labour and Welfare. by The Japan Research Institute, Ltd. Monthly Report of Prospects for Japan's Economy January 11
Prospects for Japan's economy - Projected real GDP change; 3.3% in FY1 and.3% in FY11 (1) Looking ahead, it is expected that Japan's economy will continue a "pausing situation" of its recovery, reflecting a continued weakening in exports, a reactionary decline after the end of the economic measures, and the fragile power for recovery of domestic demand. () As the effects of economic measures taken abroad fade away, it is projected that the pace of change in Japan's exports will continue decelerating to that in proportion to the tempo of growth of the world economy. For the moment, exports will be on a "getting better one month and worse the next" trend, against the backgrounds of the proceeding inventory adjustment among Asian countries and deteriorated export competitiveness due to the appreciation of the yen, and so on. The boosting effect of economic measures to stimulate the purchase of durable consumer goods, which has bolstered the economic activities thus far, will also have passed its peak. (3) It is expected that domestic private demand will continue a situation where a sense of recovery is scarcely felt, as a considerable degree of GDP gap persists. In particular, the harsh situation in the corporate sector will be prolonged. The pace of recovery in business fixed investment is predicted to remain modest because a sense of excess capacity has yet to decrease enough. It cannot be hoped that private consumption expenditure and housing investment will recover in earnest, as an improvement in income environments is expected to lag. (4) After the start of 11, a reactionary decline in demand for TVs after the rushed demand met in advance will push down the rate of real GDP growth considerably. The boosting effect of economic measures taken by the government since last September is estimated to be limited. As a result, the economy will lose momentum and the growth rate of real GDP in FY11 to March 1 is projected to be.3 per cent, a figure close to zero. (5) The deflationary trend will be seen more visibly. It is projected that the year-on-year change rate of the Consumer Price Index excluding fresh food (the core CPI) will continue to stay in negative territory for a long period of time, as deflationary pressure due to sluggish domestic demand persists, while the pace of the year-on-year decline in the index will decelerate, because of a peeling off of the resource price factor. - 9 - Monthly Report of Prospects for Japan's Economy January 11
Figure 9 s for GDP Growth and Main Indicators of Japan ( as of December 9, 1 ) (seasonally adjusted, annualised % changes from the previous quarter) CY1 CY11 CY1 1~3 4~ 7~9 1~1 1~3 4~ 7~9 1~1 1~3 FY9 FY1 FY11 (Actual) () () () (Actual) () Real GDP.8 3. 4.5.8 1..8.7. 1..4 3.3.3 Private Consumption Expenditure.4 1. 4.8.4 4. 1. 5. 1.5 1... 1.1 Housing Investment 7.5 3.1 5. 3.8 8. 3.9..7 1.5 18. 1.4 4. Business Fixed Investment 3.5 11.1 5.3 3.1.4.9 3.9 4. 4.3 13. 5. 3.4 Private Inventories (percentage points contribution) (.5) (.4) (.9) (.8) (.5) (.8) ( 1.5) (.) (.3) ( 1.1) (.4) (.1) Government Consumption Expenditure 1.3 4.1.9 1.8.9.7 1. 1.1.9 3.4. 1. Public Investment 4.7 11.4 4. 4.4 1.7 3.5 1.8.3 1.5 14. 5.3 1.4 Net Exports (percentage points contribution) (.7) ( 1.) (.) (.4) (.) (.) (.1) (.) (.1) (.3) ( 1.) (.1) Exports of Goods and Services 3. 4. 1. 4. 1.7.8 3.9 4.5 4.9 9. 17.8.7 Imports of Goods and Services 13.5 18. 1.5 1.8.1 3. 4.5 4. 4.4 1.9 1.9 3.4 (% changes from the same quarter of the previous year) Real GDP 5.9 3.5 5.3 3. 1. 1.1.1.1.4.4 3.3.3 Nominal GDP.7 1..7 1...5 1..4.1 3.7 1.1.5 GDP deflator 3..3.4 1.7.1 1.5 1.1.4.4 1.3.1.8 Consumer Price Index (excluding fresh food) 1. 1. 1....3...1 1..9. Industrial Production Index 7.4 1. 13.5 4.4.7 1.3 1. 4.4 3.9 8.9 9.. Unemployment Rate 4.9 5. 5.1 5. 4.8 4.7 4.7 4. 4.5 5.1 5. 4. Current Account Balances (trillion JY) 5.3 3.1 4.75 3.7 3.41.75 4.14 3.4 4.1 15.78 15.4 14.47 Share of Nominal GDP 4.3 3. 4...9.3 3..7 3. 3.3 3.1 3. Exchange Rates (JY/US$) 9.7 9. 85.9 8. 83. 84. 85. 8. 87. 9.9 85.7 85.5 Import Price of Crude Oil (US$/barrel) 78 8 7 83 8 8 8 8 8 9 8 8 Source: The Cabinet Office; The Ministry of Internal Affairs and Communications; The Ministry of Economy, Trade and Industry; The Ministry of Finance. The projection figures are based on those of The Japan Research Institute, Ltd. Note: The assumptions on overseas economies: the real GDP growth rate during CY11 would be 1.9% in the US, 1.1% in the euro area and 8.7% in China. - 1 - Monthly Report of Prospects for Japan's Economy January 11