Development Bank of Japan
Research Report
No. 46

Recent Trends in the Japanese Economy:
Impact of Rising International Commodity Prices
on Corporate Input/Output Behavior

September 2004

Economic and Industrial Research Department
Development Bank of Japan

This report was originally published in Japanese as Chosa No. 66
in July 2004.

Contents

Summary ........................................................................................................................ iii
I

World Economy Led by U.S. and Asia ................................................................. 1 (Figures)
1. U.S. (1): Business Investment Rising with Personal Consumption .................. 1 (21)
2. U.S. (2): Recovery in Production and Employment, Attention Focused on
the Timing of Rate Increase .............................................................................. 1 (22)
3. Economies of Major European Countries (Germany, France, U.K.):
Further Recovery .............................................................................................. 1 (23)
4. Economies of Major Asian Countries (Korea, Taiwan and Singapore):
Export-led Recovery, Slumping Consumption in Korea .................................. 2 (24)
5. China (1): Increased Concern of Overheating – Difficulty ofControlling Fixed Asset Investment ................................................................. 3 (25)
6. China (2): Growing Inflationary Trend and Limitations of Credit Controls..... 3 (26)II

Japanese Economy: Gradual Recovery Continues.............................................. 4
1. Overview: Recovery Continuing as World Economy Bounces Back............... 4 (27)
2. Harsh but Partially Improving Employment Situation...................................... 5 (28)
3. Little Improvement in Wages, Retail Sales Showing Slight Recovery ............ 6 (29-30)
4. Business Investment Increasing, with Good Prospects in Manufacturing ........ 7 (31)
5. Residential Investment Slumping but Bottoming Out ...................................... 8 (32)
6. Public Investment Falling due to Difficult Financial Situation ........................ 9 (33)
7. Yen Strengthening in PPP, Euro’s Presence Felt............................................ 10 (34)
8. Exports and Imports Increasing, Current Surplus Rising................................ 10 (35)
9. Easy Money Policy Remains ...........................................................................11 (36)

III Impact of Rising International Commodity Prices on Corporate
Input/Output Behavior......................................................................................... 12
1. Input/Output Behavior by Industrial Sector and Price
Transmission Process...................................................................................... 12 (37)
2. Uptrend Continues in International Commodity Markets............................... 12 (38)
3. China’s Rising Share in World Imports.......................................................... 13 (39)
4. Strong Yen Suppressing Import Prices ........................................................... 13 (40)
5. Slowed Decline in Corporate Goods Price, Consumer Prices in
Mild Deflation................................................................................................. 14 (41)
6. Upward Trends in Input/Output Prices Uneven in Materials Sub-sector........ 15 (42)7. Shifting Prices in Under-capacity Industries .................................................. 16 (43)
8. Downtrends of Input/Output Prices in Processing & Assembly Sub-sector... 17 (44)9. Impact of Worsening Terms of Trade on Corporate Profits (Estimate).......... 18 (45)
Appendix

Chinese Economy: Analysis of Factors behind Overheated
Investment in Fixed Assets .................................................................. 47

Development Bank of Japan Research Report/ No. 46iAnalysts and Writers:
Atsuhito Kurozumi
Masato Kanauchi
Keiichiro Oda
Takanori Wada
Yosuke Kagabayashi
Yoshiaki Hachiya
Hiroko Iwaki

Overall supervision
Sections II-1, II-4, III-1, III-7, III-9 and supervision for Chapter III
Sections I-3 and II-9
Sections I-5, I-6, III-3 (co-writer) and Appendix
Sections I-1, I-2 and II-6 to II-8
Sections II-2, II-3, II-5, III-2, III-4 and III-8 (co-writer)
Sections I-4, III-3, III-5, III-6 and III-8

This report is based on statistical data published by May 27, 2004.

ii

Development Bank of Japan Research Report/ No. 46

Recent Trends in the Japanese Economy:
Impact of Rising International Commodity Prices on Corporate
Input/Output Behavior
Summary
I. The major economies, particularly the U.S.
and Asia, continue to recover.
In the U.S., personal consumption is increasing thanks to rising wages as well as substantial tax cuts and the low interest rate policyby the Bush administration. Business investment
in information technology is also increasing as
corporate profits rise. Employment has improved
mainly in services. The prices of intermediate
and final goods are now reflecting the rapid risein raw material prices. Although the Federal
Fund rate and long-term interest rates havestayed low, the timing of a rate increase is now
attracting attention as employment and prices
continue to improve.
The major European economies (Germany,
France and the U.K.) are recovering. The German and French economies are continuing torecover gradually led by exports. In Germany,
however, slumping personal consumption israising concern about further economic recovery.
Against the backdrop of an historically low unemployment rate, the U.K. economy remains
strong led by brisk domestic demand including
personal consumption.
Led by booming exports, the recovery looks
stronger in the major Asian economies (Korea,
Taiwan and Singapore) with the exception of
Korea, where consumption continues to stagnate
due to curbs on personal lending.
In China, strong growth continues led by
fixed asset investment and private consumption,
raising concerns about overheating. The rapid
rise in raw material prices is aggravating the inflationary trend, as the materials market has
tightened due to the expansion of industrial production. Although the government has implemented a series of tight money policies such as
raising the deposit reserve requirement ratio, themoney stock continues to increase substantiallyand the inter-bank rate has not kept its high level.

II. The Japanese economy continues to recovergradually, particularly in the corporate sector.
Thanks to the global recovery led by the U.S.
and Asia, business investment continues to increase as exports and production grow. Looking
ahead, the Japanese economy is expected to continue to recover in line with the global recovery;
the recovery in the corporate sector will gradually spill over to the household sector throughimproved income and employment conditions.
On the supply side, production has been increasing since the latter half of last year particularly in electronic devices and transport equipment as the world economy has recovered, led by
the U.S. and Asia. Inventories remain low; inearly 2003, the inventory cycle moved toward an
adjustment phase as shipments slowed, but
started to build up again as shipments rose in thelatter half of the year. Tertiary industry activity is
growing as a whole. Increased employment inlarge companies has contributed to a slight decline in unemployment, although it remains high.
The number of people out of work for one year
or more is increasing.
On the demand side, consumption is showing some positive movements with improvements in consumer confidence as income andemployment prospects have brightened in someindustries. As corporate profits recover, business
investment is increasing in manufacturing, led byspending related to digital household electronic
appliances. Housing investment remains flat.
Public investment has declined almost consistently in both central and local governments due
to financial difficulties. Exports continue to growmainly to China and the rest of Asia, while imports are rising gradually.
Looking at the financial side, the Bank ofJapan is maintaining the quantitative easing policy, raising the target for the current accountbalance in January 2004 to ¥30-35 trillion.
Nonetheless, the money stock continues to growsteadily.

Development Bank of Japan Research Report/ No. 46

iii

III. International commodity prices have been
rising, reflecting increased demand for materials
in line with the global recovery and rapid growthin China. Chapter III presents an analysis of (1)the effect of rising international commodity
prices on domestic prices, (2) the trend of shifting prices as observed in corporate input/output
prices and its economic interpretation, and (3)the impact of rising input prices on corporate
profits, by classifying corporate production activities into upstream, midstream and downstream sectors. The results are summarized asfollows.
(1) Domestic prices are still showing a slightdeflationary trend. Despite the decline in
consumer prices, corporate goods price are
falling less sharply as the higher yen curbs
the rise in import prices and due to a mild
recovery in final demand. By type of goods
and by industry, the price of final goods
continues to decline but those of raw materials and intermediate goods are increasing
in a wide range of industries includingiron/steel, chemicals and non-ferrous metals.
Thus, the impact of rising internationalcommodity prices has spread from the upstream to midstream industries.
(2) The extent to which the rise in raw material
prices has been passed on to the midstream
industries, i.e. the materials industries in the
manufacturing sector, may be deduced fromthe movement of corporate input/output
prices by observing the rise in output prices
in relation to the rise in input prices. Significant rises in input prices have occurred
three times since 1990. Price shifting is mostremarkable in the present period for iron/steel
and paper/pulp, but this is not the case forchemicals and non-ferrous metals, where priceshifting is scarcely progressing. In this connection, the rate of price shifting is comparable with the over-capacity/under-capacity index, calculated from the corporate capacity
index and capacity utilization index to reflect the size of the supply-demand gap.
According to this relationship, price shifting
is progressing in under-capacity industries(iron/steel and paper/pulp), but is delayed inover-capacity industries (chemicals andiv

Development Bank of Japan Research Report/ No. 46

non-ferrous metals). This relationship canbe seen in the movement of the supply anddemand curves. In the under-capacity industries (iron/steel and paper/pulp), demand is
expanding largely due to increased demandin China (upward movement of the demand
curve); capital have consolidated alongsidebusiness and industrial restructuring (leftward movement of the supply curve); andraw material prices are rising (upward
movement of the supply curve). This has
resulted in excess demand (= under-capacity), leading to a substantial increase in prices (high price shifting rate). In
over-capacity industries (chemicals andnon-ferrous metals), on the other hand, demand is increasing (upward movement of
the demand curve) but the pressure on costs
due to rising raw material prices (upward
movement of the supply curve) is offset by
the pressure to increase supply (rightward
movement of the supply curve), thus resulting in an oversupply (= over-capacity). This
explains the minimal increase in prices (lowprice shifting rate) in those industries.
(3) As regards the impact of rising input prices
on corporate profits, a 1% increase in input
prices for materials industries is estimated toresult in a decrease of 7.1% in corporate
profits in the materials industries and of
5.1% in the processing and assembly industries through the negative effect of rising
input prices and the positive effect of priceshifting. Thus, the rise in input prices has anegative impact on corporate profits. Looking ahead, however, the recovery of theworld economy will facilitate price shifting,and sales volume is also expected to increase. Taking into account those favorable
factors, there is little risk that the rising input prices will substantially damage corporate profits for the current business year.
(As of May 27, 2004)
by the Economic Research Group(e-mail: report@dbj.go.jp)

I World Economy Led by U.S. andAsia
1. U.S. (1): Business Investment Rising with
Personal Consumption (see p. 21 for Figures)
The U.S. economy remains strong. With the contribution of the two key domestic demand itemsof personal consumption and business investment, real GDP growth in the U.S. (Figure 1-1)
was up by 4.4% (primary revision data) from theprevious quarter in January-March 2004, thetenth consecutive quarter-on-quarter increase.
Personal consumption (Figure 1-2) has increased thanks to rising wages as well as substantial tax cuts and the low interest rate policy.
Consumers have regained confidence due to rising share prices and economic expansion, butconcern regarding employment is suppressing
personal consumption. Attention is focused on
the extent to which the rise in crude oil prices
and interest rates will affect consumption.
Following a mild recovery, corporate profits
picked up and substantially increased for two
consecutive quarters in July-September and October-December 2003 (Figure 1-3). Business investment has been increasing since April-June
2003, mainly for information processing equipment.
2. U.S. (2): Recovery in Production and Employment, Attention Focused on the Timing ofRate Increase (see p. 22 for Figures)
Industrial production started growing inJuly-September 2003, and has increased for bothconsumer goods and business equipment (Figure1-4). In parallel with the increase in production,
capacity utilization in the manufacturing sector
has increased slightly, although its level remains
low.
As regards employment, the long-term decrease in the number of employees, mainly in
manufacturing, halted as employment increasedin the service sector, recording two consecutive
quarters of increase since October-December
2003 (Figure 1-5). Unemployment has declined
gradually to the mid-5% range.
In trade, imports have grown strongly reflecting the buoyant domestic economy as com-pared with other countries, and so the trade deficit has risen. Since the service balance surplus
has remained flat, the current account deficit has
also increased (Figure 1-6). By trading partner,
China surpassed Japan in 2000 and now has thelargest trade surplus with the U.S.
Prices for primary commodities including
crude oil are rising sharply. The producer priceindex shows that the prices of raw materials roseby more than 20% from the previous year. The
prices of intermediate goods also continue to riseby about 2%, and are starting to affect the pricesof final goods. The year-on-year increase in final
goods prices has thus been rising, although it isstill low. The year-on-year increase in the consumer price index (CPI) has also started to accelerate.
In finance (Figures 1-7 and 1-8), shareprices picked up as the Iraq war started and the
U.S. economy grew. Recently, however, themovement has been mixed due to negative factors such as the threat of terrorist attacks andpositive factors including the recovery of thedomestic economy. The Dow Jones Industrial
Average has been hovering around 10,000, while
the Federal Fund target rate was lowered by
0.25% on June 25, 2003 to 1.00%, the lowest
level in 45 years. As employment recovers andupward pressure on prices strengthens, the authorities and market players are now focusing on
the timing of raising the rate.
3. Economies of Major European Countries(Germany, France, U.K.): Further Recovery(see p. 23 for Figures)
The economies of major European countries arerecovering well, led by exports in Germany andFrance and by domestic demand in the U.K.
The German economy continues to recover,with real GDP growth positive for three consecutive quarters, rising by an annual rate of 1.0%
from the previous quarter in October-December
2003, and by 1.8% in January-March 2004. The
recovery is led by exports, which remain strongas the euro has stopped rising. Private consumption is the key concern to the sustainability of therecovery, as it continues its quarter-on-quarter
decline due to persistently high unemployment(Figure 1-10 (1)).

Development Bank of Japan Research Report/ No. 46

1

The French economy is also gatheringstrength. The annualized quarter-on-quarter
growth of real GDP rose from 2.5% in October-December 2003 to 3.1% in January-March
2004, the highest in two years. Exports remainstrong. Private consumption is recovering well,with an annualized quarter-on-quarter growth of
1.1% in October-December 2003 and 2.4% inJanuary-March 2004 although unemployment
remains high (Figure 1-10 (2)).
The U.K. economy remains strong. RealGDP grew 3.7% in October-December 2003 and3.0% in January-March 2004, both on an annualized quarterly basis. Backed by the stable, low
unemployment rate, private consumption rose by
an annual 2.3% from the previous quarter in October-December 2003, indicating that domestic
demand is driving economic growth in the U.K.
(Figure 1-10 (3)).
Industrial production is growing in Germany and France on the back of strong exports.
In the U.K., however, industrial production is
falling as the manufacturing sector shows weakness due to slumping exports (Figure 1-11).
Employment has not improved in Germany
and France, staying over 9% (according to the
ILO standard), and has become a major issue
particularly in Germany. In the U.K., on theother hand, employment has been supporting
domestic demand, with the unemployment rate
steady at around 4% (Figure 1-12).
Prices in the euro area are relatively stable
despite the rise in primary commodity prices as
the currency remains strong, staying below thereference value (up 2% from the previous year)of the European Central Bank. In the U.K.,
however, the Bank of England raised the official
interest rate by 0.25% both in February and May
2004, as concerns mounted about possible inflation due to rising housing prices and wages.
4. Economies of Major Asian Countries(Korea, Taiwan and Singapore): Export-led
Recovery, Slumping Consumption in Korea(see p. 24 for Figures)
In the major Asian economies (Korea, Taiwan
and Singapore), production has recovered since
the second half of 2003, driven mainly by external demand. The economic recovery has been

2

Development Bank of Japan Research Report/ No. 46

strengthening except in Korea.
In Korea, fixed capital formation improvedin October December 2003, but consumption
slumped. Export-led growth has not spread
across the economy (Figure 1-13). IT-related
exports including semiconductors remain strong.
By regions, exports to the U.S. and China havebeen strong. The positive impact of exports on
economic growth increased into the year 2003,
thus making the Korean economy more dependent on exports. The growth of fixed capital formation is largely due to investment in construction, while capital spending on machinery andequipment has made a negative contribution.
Consumption has been falling since April-June
2003, underlined by the high unemployment rate
and the surge in credit-card defaults. As competition intensified, credit card companies issued
many cards under loose criteria, leading to an
explosion of defaulting debtors during the recession in early 2003 (Figure 1-16). In response, thegovernment introduced a policy to limit credit
card issuance and place a ceiling on credit card
spending per person, triggering sluggish consumption. However, the number of credit card
defaulters is currently still high, which raises
concern that it may further adversely affect theconsumption trend.
The Taiwanese economy appears to be recovering strongly. In October-December 2003,
electronics-related exports including semiconductors boomed as worldwide IT demand recovered. Consumption also contributed to the economic growth as the employment situation improved and unemployment rate fell (Figure1-13).
Singapore’s economy is recovering. Pharmaceuticals, electronic products and petrochemicals were the core industry exports in October-December 2003, and consumption is picking up and making a positive contribution.
Price inflation currently stands at 3.3% in
Korea, which is within the target range set by thecentral bank for 2004 (2.5-3.5% (core)). The deflationary trend in Taiwan was reversed in January-March 2004. In Singapore, the central bank(MAS) has introduced a tight money policy as
prices continue to rise, shifting the target for theexchange rate from “neutral” to “acceptance ofmoderate appreciation of the Singaporean dollar”

(Figure 1-15).
5. China (1): Increased Concern of Overheating – Difficulty of Controlling Fixed Asset
Investment (see p. 25 for Figures)
There is growing concern about the overheatingof the Chinese economy. In January-March 2004,
real GDP grew 9.8%, far exceeding the annual
target of 7% published in the National People's
Congress in March (Figure 1-17). This overrunon the target growth rate is largely due to overheated fixed asset investment.
Total investment in social fixed assets has
been accelerating on an annual basis, rising
26.7% from the previous year in 2003, and evenfaster by a year-on-year growth of 43.0% inJanuary-March 2004 (Figure 1-18). By industry,
fixed asset investment in the January-March period is led by iron/steel and chemicals. Spending
related to real estate and infrastructure also accounts for a large share of fixed asset investment.
By geographical area, investment is rising inland
as well as in the coastal areas (Figure 1-19). Although such investment is increasingly led by
local governments, simultaneous implementationof similar investment projects nationwide mightlead to oversupply (Figure 1-20).
With brisk personal spending on automobiles and home electronics in particular, private
consumption has been accelerating since
July-September 2003, when the SARS epidemic
subsided (Figure 1-21).
As regards external trade, the strong growthof exports has eased, as the rate of payback in thevalue added tax refunding scheme, introduced toencourage exports, was reduced in January 2004.
On the other hand, the imports of primary products including crude oil and iron/steel sand havebeen increasing as industrial production expands.
As a result, the trade balance turned negative inJanuary-March 2004 (Figure 1-22).

the year, however, food prices increased as agricultural production stagnated due to bad weather
and the reduction in cultivated area. The inflationary trend is strengthening with raw material
prices rising in October-December 2003 and atight market for steel products caused by risingindustrial production (Figure 1-23).
The growth of money stock has slowed
since September 2003, when the People’s Bankof China raised the reserve requirements, but isstill high. Capital is flowing in from overseas inanticipation of the yuan rate being raised, while
the increase in investment projects led by local
governments is putting pressure on the banking
sector to lend more actively. Under these circumstances, the People’s Bank of China again
raised the reserve requirements in April 2004
(Figures 1-24 and 1-25).
Inter-bank rates rose temporarily following
the increase in the reserve requirements in September 2003, then fell in early 2004 and remains
in the lower 2% range. The tight money policy
introduced by the finance authorities has notbeen effective in keeping up interest rates, apparently because of the rigidity in the Chineseinterest rate system1 (Figure 1-26).
Options for cooling the overheated investment include drastic financial policies such as
raising statutory standard rates. Such measures,
however, would widen the interest rate gap with
the U.S. dollar and encourage the inflow of overseas capital by increasing the pressure to raise
the yuan rate. Any intervention by the People’s
Bank of China to support the dollar would
amplify the excess liquidity and fuel the overheated economy by releasing new investment
funds. The inadequate design of the financial
system, which contains rigid interest rates andinflexible exchange rates, along with the authority of the investment-leading local governments
over financial institutions, limits the effectiveness of controls on investment through monetary
policy (Figure 1-27).

6. China (2): Growing Inflationary Trend andLimitations of Credit Controls(see p. 26 for Figures)
Inflation showed signs of abating towardmid-2003 as the economy slowed temporarily in
April-June due to the SARS epidemic. Later in

1

The deposit and lending rates of financial institutions arein principle the flat statutory standard rates set by the RMB.
Interest rates are partially deregulated but still have to staywithin the range determined by the RMB.

Development Bank of Japan Research Report/ No. 46

3II Japanese Economy: Gradual
Recovery Continues
1. Overview: Recovery Continuing as World
Economy Bounces Back (see p. 27 for Figures)
The Japanese economy continues to recovergradually particularly in the corporate sector. As
the world economy recovers, led by the U.S. andAsia, business investment is increasing on theback of growing exports and production. Looking ahead, the improvement in the corporate
sector, supported by the recovery of the world
economy, is expected to gradually spill over tothe household sector by ameliorating the income
and employment conditions. Thus, the Japanese
economy is likely to continue to recover steadily
for some time to come.
Since starting to rise in April-June 2002,
real GDP has recorded eight consecutive quartersof year-on-year growth to January-March 2004
(Figure 2-1). Looking more closely at the growth
rates during this period (referring to seasonallyadjusted, quarterly annualized rate for the purpose of this section unless specified otherwise),real GDP growth recovered quickly in the firsthalf of FY2002 backed by a temporary surge inexports and consumption, but then fell in thesecond half to below 1%, as demand stagnated
due to falling share prices and sluggishness inoverseas economies caused by tensions over Iraq
and the SARS epidemic. In FY2003, however, as
the Iraq war ended, the SARS epidemic started torecede in June and July, and share prices rose,business investment picked up, mainly in digitalhousehold electronic appliances. The growth rate
stayed above 3% for two quarters: 3.6% in
April-June and 3.0% in July-September 2003. In
the second half of the fiscal year, exports pickedup again as the global economic recovery gained
strength, led by the U.S. and Asia. Business investment increased further, resulting in a real
GDP growth of 6.9% in October-December, thehighest figure in the current recovery phase. The
uptrend of exports and business investment continued in January-March 2004 in line with therecovery of the world economy, and consumption also remained firm as consumer confidence
improved. As a result, the economy showed ahealthy growth of 5.6% (first preliminary esti4

Development Bank of Japan Research Report/ No. 46

mates).
Looking at the trend of each GDP component, consumption shows signs of recovery withimprovements in income and employment conditions. Real private consumption recorded twoconsecutive quarters of decline in the second halfof FY2002 because consumer confidence weakened due to growing uncertainties about the future of the economy and the fall in share prices.
In FY2004, however, consumption increased for
four quarters in a row, as improving income andemployment conditions and rising share prices
boosted consumer confidence. It is worth monitoring the extent to which the improvement in thecorporate sector will spill over to the household
sector through income and employment.
Business investment is rising. Real private
non-residential investment has increased forseven straight quarters since July-September
2002 due to the recovery in production as corporate profits remain healthy. Since the beginningof FY2003 in particular, the economy has been
led by active business investment in the manufacturing sector, particularly in digital household
electronic appliances.
Residential investment remains almost flat.
Real private residential investment declined
mildly from FY2001 but was almost flat in
FY2003, as construction starts continued to accelerate for owner-occupied houses even after
the last-minute demand to benefit from the current housing loan tax break in July-September
2003.
Public investment has been falling constantly, reflecting the financial difficulties facedby both central and local governments. Real public investment has declined for eight consecutive
quarters to April-June 2002 and now accounts
for only 5% of GDP (nominal, seasonally adjusted basis). Further declines are expected as
structural reforms and financial difficulties are
set to continue.
Exports are still rising. Real exports haverecovered rapidly to lead the Japanese economy
since early 2002 with the progress of IT-related
inventory adjustment in Asia and the success ofthe monetary easing policy in the U.S. Following
a respite in rapid growth that started in the second half of 2002, due to the disappearance of the
IT-related inventory factor and the slowdown inthe global economy induced by the Iraq war and
SARS, real exports rose in July-September 2003
as the world economy recovered, and have sinceposted a double-digit quarter-on-quarter increase
for three straight periods. By region, exports arebooming to Asia, especially to China.
Imports are rising gently. As productionleveled off, real imports began to slow in thesecond half of 2002, recording the first decline insix quarters in April-June 2003. Since
July-September, however, real imports have increased for three quarters in a row due to thegradual recovery of the domestic economy.
To confirm from the supply side the trend of
GDP identified thus far, the following section
looks at the trends of key components for theindex of all-industry activity: the industrial production index (2000 as base year, 22.4% weighting in 1995), the tertiary industry activity index(1995 as base year, 59.5% weighting in 1995)
and the construction activity index (1995 as baseyear, 8.1% weighting in 1995) (Figure 2-2, seasonally adjusted).
With the progress of inventory adjustment
in IT-related products, the industrial production
index rose in January-March 2002, and recovered strongly until July-September led by theelectronic device industry and the transport
equipment industry (particularly standard-sizedcars for export and small cars for the domestic
market). In October-December, however, theindex leveled off in electronic devices as inventories increased slightly. Production stopped rising for the whole industrial and mining sector,
due to a slowdown in transport equipment causedby stagnating overseas economies and as the effect of new car sales vanished. Although thesituation in the two industries improved in
April-June, production weakened in almost allother industries as final demand. It was fearedthat inventories might enter an adjustment phase
while at a low level, as the index fell for the firsttime in six quarters for the whole sector. However, production turned up in July-September
2003 as the world economy recovered, led by the
U.S. and East Asia. The index has since risen forthree quarters in a row, with major contributions
from the electronic device and transport equipment industries. The Manufacturing Production
Forecast Survey projects large production in-creases in April and May 2004, particularly ingeneral machinery and electronic devices. If suchgrowth materializes, the average industrial production index for April and May will exceed thatfor January-March by 6.8%, pointing to the consolidation of the current uptrend.
The tertiary industry activity index bottomed
out in April-June 2002, rising for the first time infive quarters, followed by a very slight uptrend asa whole. Looking ahead, it is worth monitoring
the extent to which the recovery in the corporate
sector assists the consumption sector including
services and wholesale/retail/restaurants.
The construction activity index fell further
in FY2003, after holding steady throughout
FY2002. Some related statistics suggest that thisis due to further reduction in public works, although private construction activity is bottoming
out.
The inventory cycle (Figure 2-3) entered arecovery phase in April-June 2002 and an intentional buildup phase in July-September. Subsequently, production was swiftly adjusted tomatch shipments (Ѵ demand), which continued
to show little improvement until July-September
2003. As a result, the inventory cycle approachedthe 45-degree line while inventories remained
below the previous year’s level (crossing the
45-degree line from upper left to lower rightwould be a sign of recession). In October-December 2003, inventories were still lower
than in the previous year but shipments rose withthe global economic recovery. Thus, the inventory cycle was renewed, receding again from the
45-degree line. The cycle returned to a buildup
phase in January-March 2004, with increased
shipments and low inventories.
2.

Harsh but Partially Improving Employment Situation (see p. 28 for Figures)

The ratio of active job openings to applicants has
been rising since the bottom of 0.51 in January-March 2002 (Figure 2-4). This is because thenumerator (i.e. the number of job offers) continues to increase while the denominator (i.e. thenumber of job seekers) declines.
The unemployment rate stayed high fromthe latter half of 2001 but has declined gently
since July-September 2003. One positive factor

Development Bank of Japan Research Report/ No. 46

5has been the reduction in the number of unemployed, from a record high of 3.85 million in
April 2003 (raw data). However, this figure must
be interpreted cautiously because the labor force
has shrunk as many people have left the labormarket. 2 By period of unemployment (Figure2-5), the share of those unemployed for one year
or longer has been increasing, which indicatesthat long-term unemployment has scarcely improved.
The number of workers increased from a
low in April-June 2002, but the improvement
slowed after recording a year-on-year increase in
April-June 2003, then leveled off (Figure 2-6(1)).
By industrial sector,3 the number of workers has
been decreasing in manufacturing and construction, and the increase is led by the service sector,
particularly in industries related to medical careand welfare. Looking at the different employee
classification, the rise in temporary and daily
employees4 has been slowing, while the numberof regular employees rose after a long period of
decline (Figure 2-6(2)). By size of corporation,
the number of employees in large corporations(employing 500 or more workers), which had
declined substantially since the second half of2001, rose in 2003 and boosted the total numberof employees (Figure 2-6(3)). Meanwhile, smaller companies (employing less than 500 workers)
are still shedding workers, particularly thesmallest corporations employing less than 30
workers.
Overtime hours have been increasing steadily after reaching a low in October-December
2001, thanks to the recovery in corporate production (Figure 2-7). The increase is most significant in the manufacturing sector, where overtime hours surpassed the values reached during
the recent two peaks.5 The rise in overtime hours

2

Average labor force for FY2003 stands at 66.62 million
workers, down 0.15 million from the average for the previous fiscal year.
3
Based on the new industrial classification (revised in
March 2002).
4
Temporary and daily employees refer to those hired for aperiod of one year or less, and regular employees refer to
executives and those hired for a period of over one year orfor an undetermined period.
5
April-June 1997 and October-December 2000 (provisional) on a quarterly basis. The amount of overtime hours
also peaked in those periods.
6

Development Bank of Japan Research Report/ No. 46

suggests further recovery in employment,6 but
the actual increase in employment has beenrather slow, as mentioned above. It is worth
monitoring the extent to which the surge in corporate production affects employment.
3. Little Improvement in Wages, Retail Sales
Showing Slight Recovery(see pp. 29-30 for Figures)
The year-on-year change in total cash earnings
per person based on the Monthly Labor Survey
indicates continued sub-par performance (Figure2-8). In more detail, overtime pay continues torise on the previous year with the increase in
overtime hours, but regular wages and salaries aswell as bonus and special earnings show no improvement, partly due to the downward pressure
from the rising share of part-time workers in theworkforce.7
Figure 2-9 shows the trend of bonuses.
Summer bonuses for 2003 were strong, increasing for the first time in three years thanks to improved corporate profits mainly in the manufacturing sector. However, the recovery has notlasted as year-end bonuses fell again. In the
midst of wage cutbacks, the spring wage negotiations for this fiscal year will again lead to poor
results.
Against this backdrop, real private final
consumption according to the GDP estimate has
shown little quarter-to-quarter movement but has
been rising slightly recently (Figure 2-10). Consumption based on the GDP estimate necessarily
diverges from consumption based on the Family
Income and Expenditure Survey due to such factors as the rise resulting from the increase inpopulation and number of households as well as
the inclusion of imputed rent. Nonetheless, thenominal consumption expenditure of all house6

In recent years, it takes longer for an increase in overtime
hours to result in an increase in employment. See Ministryof Health, Labour and Welfare, “White Paper on Labour
2003,” Section 1-3.
7
Part-time workers receive just over 20% of the wages
earned by full-time workers, in part due to the difference inhours worked. Therefore, any increase in the share ofpart-time workers in the workforce exerts downward pressure on wages per person.
 Indeed, this downward pressure is considerable. For details, see DBJ, “Bottoming out of wages and regular wages
and salaries,” Monthly Economic Notes, November 2003.

holds in the Family Income and Expenditure
Survey has been recovering recently as consumer
confidence has improved, as will be mentioned
later (Figure 2-11). Particularly in January-March 2004, it recorded a substantial
year-on-year increase of 2.0%, due in part to theleap-year effect.8 By type of items, the increaseis led by expenditures related to car purchases,
housing(including
reform)andreading/recreation.
Likewise, on the supply side, the retail sales
index (Figure 2-12) continued to decline but has
recently recovered somewhat. Sales of clothing,food and beverages have been improving, particularly for seasonal clothes, owing to the effectof discount sales and relatively high temperature.
Although sales of home appliances continue todecline as a whole, sales of DVD players and TV
sets with liquid crystal, plasma and otherflat-panel displays have been firm.9
Figure 2-13 shows the number of passenger
car sales. Sales of small cars, which led the market in FY2002, continue to decline as demand
has peaked, whereas sales of standard-sized cars
and light vehicles have increased. On balance,
car sales have been recovering slowly.
Looking at the year-on-year trend of tourism
sales (Figure 2-14), overseas travel plunged in
the first half of 2003 due to the Iraq war and the
SARS epidemic mainly in Asia, recording asteeper decline in April-June 2003 than in October-December 2001, when the impact of the 9/11
terrorist attacks was felt. Subsequently, however,sales of overseas travel have been recovering
gradually since the end of the Iraq war (April
2003) and the SARS epidemic, and have now
resumed the level of the previous year. Meanwhile, sales of domestic tours have remained
almost flat, and so tourism sales as a whole arerecovering.
Finally, individual indicators confirm therecovery of consumer sentiment. The Consumer
Confidence Index for the coming six months10
8

Nominal consumption rose 5.2% on the previous year in
the month of February. The value stays positive even if theleap-year effect is removed.
9
According to data provided by the Nippon Electric
Big-Stores Association.
10
In April 2004, the Cabinet Office consolidated the former
Consumer Confidence Survey, Monthly Consumer Confidence Survey and One-person Households Consumer Con-

(Figure 2-15(1)) reflects expectations for economic recovery, and indicates improvement inalmost all items including employment and overall livelihood. The Living Insecurity Index (Figure 2-15(2)) is starting to improve although withsome fluctuation. The Nikkei Consumption
Forecast Index has improved for two consecutive
quarters after experiencing anabasis and slump.
Thus, consumer sentiment indicators havestrengthened, propping up the recovery in consumption recently. However, consumption is notready to recover fully, as incomes are falling andemployment is hardly improving. Indeed, consumption could fall if uncertainties about income
and employment conditions persist.
4. Business Investment Increasing, with Good
Prospects in Manufacturing(see p. 31 for Figures)
Business investment is increasing. According to
the Statistical Survey of Incorporated Enterprises(Figure 2-16), business investment in all industries has increased on the previous year for threeconsecutive quarters since April-June 2003. The
increase is particularly significant in the manufacturing sector, where corporate profits recovered and return on investment improved.
Figure 2-17 shows the year-on-year change
in capital stock in the manufacturing sector according to the “Gross Capital Stock of Private
Enterprises.” Although the investment in newplant and equipment (flow) has increased on theprevious year for four consecutive quarters since
January-March 2003, the stock amount on a progress basis has fallen since April-June 2003. The
growth of capital stock normally turns up following a recovery in business investment, but
capital stock is currently continuing to decline
even as business investment increases. One reason may be that the active corporate business
investment has been accompanied by the consolidation of existing plant and equipment
through business restructuring, including thedisposal of excess capacity and withdrawal from
unprofitable businesses. If this is true, theabove-mentioned improvement in return on investment in the manufacturing sector is not only
fidence Survey into the new Consumer Confidence Survey.
Development Bank of Japan Research Report/ No. 46

7due to cyclical factors such as rising corporate
profits but also due to the improvement in returnon investment in tangible fixed assets made possible by such capacity consolidation.
What impact has the decline in capital stock
through capacity consolidation had on the improvement of corporate capacity utilization ratio?
Since the capacity utilization ratio index can be
defined as the ratio of actual production volume
to capacity (actual production/capacity), achange in the capacity utilization ratio may be
explained by two factors: change in capacity(denominator) and change in production (numerator). Figure 2-18 breaks down the
year-on-year growth of the capacity utilization
ratio index into the production factor(year-on-year change in the capacity utilization
ratio index – year-on-year change in the capacity
index) and the capacity factor (year-on-yearchange in the capacity index). It is observed thatsince the latter half of 1998, the capacity factor,
through capacity reduction, has constantly contributed to the improvement in the capacity utilization ratio. Since the latter half of 2002, theproduction factor also contributed to the rise in
the capacity utilization ratio through demand
expansion. These facts indicate that the current
recovery in business investment has occurred due
to not only the cyclical movement of demand
recovery but also the elimination of excess capacity and capacity reduction through businessrestructuring. Indeed, the capacity utilization ratio index has been moving in parallel with the
diffusion index on production capacity in the
manufacturing sector (Figure 2-20), attesting to
the close relationship between the improvementin capacity utilization ratio and capacity reduction.
Figure 2-19 shows the movement of machinery orders (domestic private demand excluding ships and electric power), a good leading
indicator of business investment. After recording
a substantial growth of 18.2% on the previous
year in October-December 2003, machinery orders slowed abruptly to 1.8% in the following
period of January-March 2004. The Forecast of
Machinery Orders for April-June 2004 indicatesthat machinery orders will decline 2.2% on theprevious year, the first fall since October-December 2002. Since machinery orders are

8

Development Bank of Japan Research Report/ No. 46

usually supposed to lead business investment by
two to three quarters, the forecast means thatbusiness investment will weaken temporarily inthe second half of FY2004. Nonetheless, forseveral reasons, business investment is expected
to remain firm for some time to come, mainly inthe manufacturing sector. Machinery orders fromthe manufacturing sector are expected to record
another double-digit increase on the previous
year in April-June 2004. Corporate profits, key
fundamentals in determining the prospects ofbusiness investment, are slated to increase again
in FY2004 for both manufacturing andnon-manufacturing.
5. Residential Investment Slumping but Bottoming Out (see p. 32 for Figures)
Housing starts (seasonally adjusted annual rate)
have been weak since 2001, staying around the
1.2 million mark (Figure 2-21).
The year-on-year change by component(Figure 2-22) indicates that the construction ofowner-occupied houses rose substantially in thefirst half of FY2003 due to the last-minute demand before the termination of the housing loan
tax break,11 followed by a drop in reaction since
the latter half of the year. On the other hand, theconstruction of housing for rent and for sale has
been rising since the second half of 2003, due tothe acceleration of construction starts in anticipation of rising interest rates, as long-term interest
rates started to rise in the summer. As a result,housing starts as a whole have increased on theprevious year for two consecutive quarters.
Housing starts appear to be bottoming out although they are still low. Even so, housing starts
are unlikely to fully recover quickly, due to thevery slow pace of improvement in employment
and income conditions. Thus, housing starts are
expected to remain flat in the months ahead.
The floor area of housing starts shows asimilar trend to the units of housing starts, currently higher than in the previous year (Figure
11
Since purchasers had to move into the houses before theend of 2003 to benefit from the tax reduction scheme, thestepped-up demand appeared in the first half of 2003 asincreased housing starts. It was decided that the deadline of
the scheme would be extended to the end of 2004 (progressive reduction in the tax break expected for 2005 and onward).

2-23).
As can be deduced from the movement of
housing starts, real private housing investment(seasonally adjusted annual rate) is at a low level(Figure 2-24), although there has been a slight
improvement recently.
In the condominium12 market, stocks which
had accumulated by 2002 both in the Tokyo
metropolitan area and Kinki area have been reduced13 (Figures 2-25 and 2-26). Although the
cutbacks on stocks might suggest an increase incondominium starts in the months ahead, someargue that the decline actually reflects fewer
units marketed due to the postponement ofsales.14 Therefore, the decrease in stock may not
result in an increase in housing starts for sometime to come.
6. Public Investment Falling due to Difficult
Financial Situation (see p. 33 for Figures)
Public investment (public fixed capital formation) has declined almost continuously since
1999, due to cuts in expenditures forced by financial difficulties (Figure 2-27). Consequently,
public investment now accounts for only 5.1% of
GDP (seasonally adjusted nominal values), down
four percentage points from its peak.
Value of public works contracted, a leading
indicator, fell 13.7% in FY2003, the fifth straightyear of decline (Figure 2-28). The public works
implemented by the central government continue
to decline due to spending cuts in line with thebudget reform policy of the Koizumi Cabinet.
The decline is all the more significant for Janu12

For the purpose of this report, the term “condominium”
refers to a subdivided housing lot made of reinforced steel
frames, ferro-concrete or steel frames.
13
The statistics of Building Construction Started include
condominiums in housing for sale. Condominium housing
starts in the Tokyo metropolitan area (Saitama Prefecture,
Chiba Prefecture, Metropolis of Tokyo, and Kanagawa Prefecture) and Kinki area (Shiga Prefecture, Kyoto Prefecture,
Osaka Prefecture, Hyogo Prefecture, Nara Prefecture, Wakayama Prefecture) account for 77.8% of the national total(FY2003). The share has been rising in recent years due toincreased condominium starts in those areas, particularly in
inner-city districts.
14
The Real Estate Economic Institute calculates the unitsof stock at the end of the current month as the units of stockat the end of the previous month + the units marketed in thecurrent month – the units sold in the current month. Hence,
the units not marketed are not statistically counted as stock.

ary-March 2003 because no major public investment items were included in the supplementary budget. Likewise, the public works implemented by local governments, which account for
70% of public investment, have been curtailed in
the face of the dire financial situation.
The reduction of public investment is expected to continue, as the initial budget for
FY2004 proposes reductions from the previous
year of 3.3% in central government expenditureson public works projects and 8.4% in investment
expenses under local finance plans. Public investment will continue to shrink, with the Ministry of Finance already envisaging a further 3%
cut on central government expenditures on public
works projects in the FY 2005 budget.15
Although public investment is declining,government final consumption leveled off in2002 but still accounted for over 17% of GDP,
propped up by the increase in medical cost in
particular.
Budget revenue has been slumping due tothe sluggish economy and income and other tax
reductions, resulting in major budget deficits forboth central and local governments. Since thedeficits have been largely financed by government bond issues and by borrowings in the special account for local allocation tax, outstanding
government debts have ballooned. Indeed, theoutstanding long-term debts of central and local
governments will total ¥719 trillion at the end of
FY2004, accounting for some 144% of GDP(Figure 2-29). Although the Koizumi Cabinet
had committed to capping new central government bond issues at ¥30 trillion per annum, it has
been unable to hold back bond issues, whichamounted to ¥35 trillion in FY2002 (after supplementary budget), ¥36 trillion in FY2003 (after
supplementary budget) and ¥37 trillion in
FY2004 (initial budget).
In comparison with the U.S. and 15 EU
member states, it is clear that Japan’s public finances are in dire straits, both in terms of stock(outstanding general government debts as a percentage of GDP) and in terms of flow (primarybalance, i.e. budgetary balance excluding bondissues, interest payments and bond redemptions)(Figure 2-30). Although the government aims to
15

Nihon Keizai Shimbun, April 22, 2004.

Development Bank of Japan Research Report/ No. 46

9reverse the deficit of primary balance by theearly 2010s,16 concerns about the sustainabilityof public finances have not dissipated.
7. Yen Strengthening in PPP, Euro’s Presence
Felt (see p. 34 for Figures)
Figure 2-31 shows the trend of real effective exchange rates of major currencies. The Japanese
yen has been almost flat since 2002, as the U.S.
dollar weakened and the euro strengthened
against other currencies. As the purchasing
power parity tends to shift in favor of the yen,reflecting the inflation gap between Japan andthe U.S., the yen/dollar rate is on the decline (i.e.
the yen is rising) due to various factors including
geopolitical risk, concern about terrorism and the
inflow of stock investment (Figure 2-32).
To control the pressure for yen appreciation,
the Japanese monetary authorities in FY2003
made a record-scale market intervention of ¥30
trillion, leading to foreign exchange reserves exceeding $800 million (U.S. dollar equivalent) as
at the end of FY2003 (Figures 2-33 and 2-34).
The composition of currencies used in theJapanese merchandise trade points to a decline in
the share of the U.S. dollar for both exports andimports, as the share of trade with Asia increases
and the dollar has been replaced with the euro intrade with Europe (Figure 2-35).
The composition of currencies in foreignexchange reserves shows that the U.S. dollar stillaccounts for over 60%. However, the share of theeuro has been rising as it gains importance as aninternational currency, as well as mounting concerns about the “twin deficits” of the U.S. (Figure 2-36). The Euro’s stronger presence corresponds to a gradual move away from the U.S.
dollar.
8. Exports and Imports Increasing, Current
Surplus Rising (see p. 35 for Figures)Japanese exports are increasing in line with economic expansion in the U.S. and Asia, and imports are rising as the domestic economy recov16

Paper presented to the Council on Economic and Fiscal
Policy, “Structural Reform and Medium-Term Economic
and Fiscal Perspectives – FY2003 Revision,” (January 16,2004).
10

Development Bank of Japan Research Report/ No. 46

ers (Figure 2-37). One of the structural factors
behind the simultaneous increase in exports andimports is the international division of laborwithin the Asian region.
Looking at a breakdown of exports bycountry (Figure 2-38), booming exports to thefast-growing China have been leading the overall
growth in the current economic recovery phasesince April-June 2002. In contrast, exports to the
U.S. continued to decline throughout 2003 as
local auto production facilities became operational and plants producing office equipment for
the U.S. were transferred to other Asian countries.
Figure 2-39 shows the trend of exports foreach type of goods based on the “Analysis of All
Industrial Activities” published by the Ministryof Economy, Trade and Industry. The substantial
contribution of producer goods in the first half of2002, at the initial stage of the current recovery
phase, has expanded gradually to consumer durables and capital goods. Producer goods havealso made a substantial contribution to thegrowth of imports (Figure 2-39), reflecting the
progress in the international division of labor.
The trade surplus is expanding as the difference in the pace of recovery between domestic
and overseas markets has led to a difference ingrowth between exports and imports. The current
account surplus is also expanding as the increasein external net assets widened the balance of income surplus while the wars in Afghanistan and
Iraq and the SARS epidemic reduced the service
deficit by curtailing the number of travelers(Figure 2-40).
The current account surplus has traditionallycontributed to the equilibrium of the balance of
payments by generating a comparable deficit in
the capital account mainly through external investment. Since April-June 2003, however, thebalance of the capital account has also been inblack, largely due to rising inflows of funds into
stock markets from foreign investors. To combat
the disruption in the balance of payments, foreign exchange reserves were increased throughpowerful market intervention.

9. Easy Money Policy Remains(see p. 36 for Figures)
In the financial markets, the quantitative monetary easing policy has been in place since March
2001, with a direct guidance target set in terms ofcurrent account balance. This has had a substantial impact on short-term interest rates. Indeed,
the overnight-unsecured call rate and yields on
three-month CDs (bid) have remained at low
levels, near 0% and 0.1% respectively (Figure2-42).
The commitment to continue the quantitative monetary easing policy was announced in
October 2003, setting clearer criteria for terminating the policy. After this announcement,
yields on 10-year government bonds–a good indicator of long-term interest rates and volatile
temporarily last year, remain relatively stable(Figure 2-42).
Further quantitative easing measures weretaken in January 2004, raising the target for the
Bank of Japan’s current account balance to approximately ¥30-35 trillion. As a result, themonetary base has been recording double-digit
increases on the previous year (Figure 2-44).
Money stock continues to grow only slightly on

the previous year, but is still high as a percentage
of nominal GDP.
As a means of monetary control, themonthly amount of long-term government bondbuys has stayed around ¥1.2 trillion (Figure2-43). As regards the government bond repurchasing operation, its duration was extended andcash was newly accepted as eligible collateral. In
addition, the principal terms and conditions forthe outright purchases of asset backed securities,
which started in 2003, were amended in January
2004 to expand the eligibility of underlying assets.
The attitude of private banks toward lending
to SMEs is still strict but has softened somewhat,
as the diffusion index on the lending attitude offinancial institutions continues to improve (Figure 2-46). The decline in lending by privatebanks has become less steep. The trend is clearer
after adjustments for special factors (e.g. fluctuation due to the mobilization or amortization of
credited loans) (Figure 2-45). Contracted interest
rates on new bank loans are stable at a low level.
CP/corporate bond issues are in good condition,with spreads stable at a low level. Outstanding
issues also continue to exceed the level of theprevious year.

Development Bank of Japan Research Report/ No. 46

11III Impact of Rising International
Commodity Prices on Corporate
Input/Output Behavior
1. Input/Output Behavior by Industrial Sector
and Price Transmission Process(see p. 37 for Figures)
International commodity prices have been rising,spurred by increased demand for materials largely due to the recovery of the world economy
and the rapid growth in China. While the Japanese economy still needs more time to escapefrom deflation, the rise in corporate material input costs will negatively affect corporate profits
through the deterioration of the terms of trade(output prices/input prices). Thus, rising commodity prices might undermine the Japanese
economy, which continues to recover gradually
led by the corporate sector.
The framework of analysis in this chapter isshown in Figure 3-1. First, industrial activities
are classified into the three sectors of upstream,
midstream and downstream to clarify the impactof rising international commodity prices on industrial activities. The upstream sector includes
suppliers to the midstream sectors of raw materials such as iron ore, coal and limestone (e.g. resource-developing countries, regions and corporations). The midstream sector comprises industries that have production facilities to process theraw material inputs from the upstream sector andsupply intermediate products to the downstream
sector (e.g. materials industries in the manufacturing sector). The downstream sector is composed of industries that supply final products in
response to final demand in the world and domestic markets (e.g. processing and assembly
industries in the manufacturing sector). The output prices and output volume in each of the threesectors are considered to be determined by theshape of the demand curve in the downstream
sector that reflects final demand, and that of the
supply curve in each sector. However, the impactof rising international commodity prices on corporate output prices and output volume tends tobe more apparent in the midstream sector than in
the downstream sector for the following reasons.

12

Development Bank of Japan Research Report/ No. 46(1) In the downstream sector, natural resources
have a minimal weight in input cost. Hence,the pressure on costs from such factors as
rising international commodity prices (upward shift of the supply curve) is smaller
than in the midstream sector.
(2) Input/output prices in the downstream sector
are on a long-term downtrend (independentof the rising international commodity prices),largely reflecting technological and process
innovations.
The following sections examine the impactof rising international commodity prices on domestic prices in the upstream, midstream anddownstream sectors (import prices, corporate
goods price, consumer prices, corporate service
prices) and on corporate input/output prices, aswell as the impact of the worsening terms oftrade on corporate profits.
2. Uptrend Continues in International Commodity Markets (see p. 38 for Figures)This section outlines the trend of internationalcommodity prices.
The price of crude oil (Figure 3-2) rose in
the latter half of 2002 as tensions mounted in the
Middle East. Although the price stabilized whenthe Iraq war ended, it rose again and reached$40/barrel in May 2004, the highest level since1990 when the Gulf War broke out. The rise in
crude oil price is attributable to several factors
including:(1) Increased demand due to the global economic recovery;(2) Mounting uncertainties about supply stability due to the surge in terrorist attacks particularly in the Middle East even after theend of the Iraq war, and the delay in rebuilding Iraq;(3) Production adjustment by OPEC countries;and(4) Dwindling oil stocks in the U.S.
Looking at the trend of international commodity markets (Figure 2-3)17, commodity prices
17
IMF’s international commodity index is used in this section. The IMF index does not cover precious metals such asgold and silver. Other representative commodity market
indicators include the futures price index of the CRB(Commodity Research Bureau), which typically covers

show a similar trend to crude oil price, continuing to rise even after the end of the Iraq war. The
year-on-year change (Figure 3-4) indicates that
commodity prices have risen for seven consecutive quarters since July-September 2002, andeven now are rising by about 10% on the previous year. By product, the largest contribution
comes from energy-related products including
crude oil. 18 Even excluding energy-related
products (Figure 3-5), however, there have beensignificant price increases for many commodities
including metals (aluminum, nickel, copper, etc.),
foods (soybeans, maize, etc.) and other agricultural products (rubber, etc.). Thus, the current
hike in market prices is not limited to crude oil
but also applies to international commodities as awhole.
The steep rise in international commodity
prices has two dimensions. First, it has a financial dimension. Monetary easing on an international scale has increased liquidity, while thecurrent trend of dollar depreciation 19 has reduced the attraction of dollar-denominated assets.
Thus, speculative funds are flowing into commodity markets. The second dimension relates tothe real economy. The recovery in the world
economy and the rapid development of the Chinese economy have increased the demand forprimary commodities, thus tightening the markets.
The steep rise in commodity prices seems to
be a result of the interaction between those financial and physical dimensions.

price of scrap iron (price for Asia), which is used
for electric furnace steel production, has been
rising in line with growing Chinese imports.
China’s share in plastic (a primary commodity) imports has recorded a similar increase.
In 2002, the share was about 2.5 times as large asin 1990. Plastic imports have been increasing on
a monthly basis on the back of active domestic
demand for infrastructure improvement including
sewage pipes. The price of polystyrene resin20 in
East Asia declined in the first half of 2003 but
has recovered since the second half of the year.
This reflects increased demand in China and rising production cost (steep rise in the price ofnaphtha, which is required for resin production,
as well as the price of crude oil, which is required for naphtha production).
China’s soybean imports increased substantially in 2003, for two main reasons:(1) Production in China has declined due to the
reduction in planted area as farmland has
been converted to industrial use, as well as
to the impact of natural disasters including
the drought in the previous year.
(2) More soybeans are being used as fodder due
to the improvement of dietary standard that
accompanies economic growth.
As supply capacity declines due to bad
weather in major producer countries including
the U.S. and Brazil, the soybean price (Chicago
market price) has been surging since the latter
half of 2003 due mainly to increased demand in
China and the inflow of speculative funds.

3. China’s Rising Share in World Imports(see p. 39 for Figures)

4. Strong Yen Suppressing Import Prices(see p. 40 for Figures)

The share of China in world steel imports
reached 8.9% in 2002, rapidly closing the gap
with the first-ranked U.S. On a monthly basis,steel imports have been increasing substantiallysince 2003. China’s steel production and steel
imports are supported by active demand for construction in anticipation of future growth. The

Figure 3-7 shows the trend of price indices inJapan. Although the corporate price index andthe consumer price index (general excluding
fresh foods) are both recovering, the movement
is still weak compared with the corresponding
U.S. price indices (Figure 3-8). However, theimport price index is rising on a contract currency basis.

many cereal-related products. No significant difference isobserved between various commodity indices as regards theoverall trend.
18
Crude oil is given a weighting of approximately 40% in
the IMF index.
19
See Figure 2-31 in Chapter II.

20

Although polyvinyl chloride resin is used for sewage
pipes, polyethylene price is used here due to data limitations.
Development Bank of Japan Research Report/ No. 46

13

The trend of the import price index on acontract currency basis 21 (Figure 3-9(1)) indicates an increase on the previous year for each of
the six quarters since October-December 2002. A
comparison with Figure 3-3 reveals that the contract currency-based import price index has been
moving almost in parallel with the internationalcommodity price index. Thus, rising international commodity prices underlie the recent risein the index.
By product, there has been a steep rise for“petroleum/coal/natural gas,” reflecting the highcrude oil price, as well as positive contributions
from “metals/related products” (includingiron/steel, copper ore and nickel) and “foodstuffs/feedstuffs” (including soybeans and maize).
Thus, the data represent a faithful projection of
the trend of each commodity’s international
market price (Figures 3-4 and 3-5). Incidentally,
although the price of “machinery and equipment”
including PCs and other IT-related products has
continued to decline on a year-on-year basis, thedecline has been slowing.
The yen-based import price index (Figure
3-9(2)) is falling, recording back-to-back declines on the previous year in the last two quarters and in stark contrast to the contract currency-based index. The yen appreciation is behind this movement. Thus, rising prices on acontract currency basis have not yet impacted
yen-based prices.
Looking at the year-on-year change bycomponent, “metals/related products” and “foodstuffs/feedstuffs” continue to make positive contributions even on yen-based prices, but the contribution of “petroleum/coal/natural gas” hasbeen negative for two consecutive quarters on a
yen basis, while it remains positive on a contract
currency basis.22 Also, the decline in the price of“machinery and equipment” has become steeper,
exerting downward pressure on yen-based prices.
Thus, the rise in the import price index on a contract currency basis has not resulted in an increase in yen-based prices, which are currently
falling. In fact, yen-based prices have been stable
due to the impact of the yen appreciation, which
protects the import price index against the upward pressure of rising international commodity
prices.
5. Slowed Decline in Corporate Goods Price,
Consumer Prices in Mild Deflation(see p. 41 for Figures)
The decline in corporate goods price (domestic
demand goods23) has been slowing as a whole.
The price of raw materials (import prices) rosefrom October-December 2002 to July-September
2003 due to the increase in crude oil price. Also,
the prices of intermediate materials (domestic
products) rose in July-September 2003. By industry, minerals (crude petroleum, etc.) in raw
materials industries, energy-related industries(petroleum/coal products in particular), chemicals and iron/steel are all making positive contributions. Currently, the positive contributionsof iron/steel, food and non-ferrous metals in particular are growing. The contribution of minerals
has been negative since October-December 2003,
largely for the following reasons24 (Figure 3-10):(1) The rise in crude petroleum price has been
offset by the yen appreciation.
(2) The price of coal has been declining, particularly for general coal, which is procured
under long-term contracts.

21

Looking at the composition of contract currencies, theU.S. dollar has the largest share with 70.5%, followed by
the yen with 23.9% and then by the euro with 3.5% (as ofDecember 2003).
22
Difference in the composition of contract currencies may
be one of the reasons why the contribution of “metals/related products” and “foodstuffs/feedstuffs” stays positive while that of “petroleum/coal/natural gas” has turned
negative. Indeed, the share of the yen in total contracts stands at
14.7% for “metals/related products” and 17.0% for “foodstuffs/feedstuffs,” but 0.0% for “petroleum/coal/natural gas”
(data as of December 2003), which means that all transactionsin those products are denominated in a foreign currency
14

Development Bank of Japan Research Report/ No. 46(U.S. dollar). Thus, the impact of foreign exchange rate
fluctuations is greater on the price of “oil/coal/natural gas,”
when expressed in yen.
23
Domestic demand goods refer to the weighted average ofdomestic products and imports.
24
Judged from the Bank of Japan’s import price statistics,
which are used for calculating the prices of domestic demand goods. The prices of domestic demand goods can be
broken down to the level of the types of goods and industries. Data on individual products are not published.

As regards consumer prices (excluding fresh
foods), public service prices turned up in
FY2003, largely due to the increase in the medical copayment rate. Agricultural and livestock
products also made positive contributions as theprice of rice increased due to the unusually coolsummer. Aside from such extraordinary factors,
consumer prices are tending to fall slightly,
making a negative contribution to overall prices(Figure 3-11).
As for corporate service prices, transportation (an overseas factor) has been making a positive contribution since October-December 2002.
However, they continue to decline by about 1%
on the previous year on a domestic factor basis,
particularly in leasing/rental and real estate (Figure 3-12).
The above observations may be summarized
as follows. Corporate goods price (domestic demand goods) show signs of bottoming out as:(1) The prices of raw materials and intermediatematerials are rising;(2) The prices of final goods are declining further; and(3) Corporate goods price (domestic demand
goods) rose in April.
However, consumer prices are still following a mild deflationary trend, continuing to decline when the factors related to agricultural andlivestock products are excluded.25
6. Upward Trends in Input/Output Prices
Uneven in Materials Sub-sector(see p. 42 for Figures)
Based on the Bank of Japan’s “Input-Output
Price Index of Manufacturing Industry by Sector,” this section examines the rise in raw material and intermediate material prices, confirmedby the trend of corporate prices presented in theprevious chapter, from the perspective of production activities in the manufacturing sector.
For this purpose, the manufacturing sector isclassified into two sub-sectors: the materials in-dustries26 and the processing and assembly industries.27 Focusing on the materials sub-sector,
this section examines:(1) The trend of input prices (prices of goods
used for production) and output prices(prices of products), and(2) The extent to which rising input prices havebeen passed on to output prices since the1990s.
The input prices of the materials industries
rose as a whole in July-September 2002, and havecontinued to do so. By industry, chemicals (including petrochemicals), iron/steel, pulp/paper/wooden
products and textiles have made positive contributions. Currently, the positive contribution ofchemicals is shrinking but that of iron/steel andnon-ferrous metals is increasing (Figure 3-13).
Looking at the input prices of the iron/steel industry in detail, scrap iron has made a significant
positive contribution, showing the impact of rising international commodity prices due to increased demand in China.
The output prices for the materials
sub-sector turned up as a whole in October-December 2002, and have continued to rise.
By industry, the negative contribution of textiles
is more than offset by the positive contribution ofchemicals and iron/steel. Currently, the positive
contribution of chemicals is shrinking, while
those of iron/steel, non-ferrous metals andpulp/paper/wooden products remain substantial(Figure 3-14).
Thus, the input prices and output prices ofthe materials sub-sector increased as a wholewith some time lag, but both have been moving
upward recently. Individual industries are considered to have different impacts on the rise in
the input and output prices in the materials
sub-sector as a whole, with different degrees of
price shifting.

26

25

According to the Bank of Japan’s “Outlook for Economic Activities and Prices (April 2004),” the majority of
the Policy Board members forecast a decline of 0.1-0.2%(median: 0.2%) in consumer prices (excluding fresh foods)
for FY2004.

The materials sub-sector includes textiles, pulp/paper/wood
products, chemicals, ceramics/stone/clay, iron/steel andnon-ferrous metals.
27
The processing and assembly sub-sector includes food,general machinery, electrical machinery, precision machinery and transportation equipment.
Development Bank of Japan Research Report/ No. 46

15

To verify this, the extent to which the rise in
input prices was shifted from each materials industry (price shifting rate)28 was calculated forthree cases since the 1990 (Period I, Period II
and Period III). 29 The following results wereobtained.
(1) The price shifting rate has been declining inchemicals. Also, the rate is lower for Period
III than for Period I in non-ferrous metals.
(2) The price shifting rate is highest for Period
III in iron/steel and paper/pulp.
In summary, the progress of price shifting
differs in individual industries. In the current
period, price shifting progressed in iron/steel andpaper/pulp, but declined in chemicals andnon-ferrous metals (Figure 3-15).
7. Shifting Prices in Under-capacity Industries(see p. 43 for Figures)
The different price shifting rates among the materials industries may be explained by the difference in (1) production capacity and (2) the stateof competition. Since corporate production capacity determines the amount of supply, any under-capacity in relation to actual demand would
raise prices through excess demand, thus increasing the price shifting rate. Conversely, any
over-capacity in relation to actual demand would
reduce prices through oversupply, thus curbing
the price shifting rate. Any difference in the stateof competition for individual corporations would
impact on corporate supply by reflecting differences in the progress of business restructuring
and industrial reorganization or in the degree ofpressure for increasing supply in individual industries. This would in turn influence the priceshifting rate through differences in equilibrium
28
The price shifting rate is calculated as follows:
Price shifting rate (%) = rise in output price index frombottom to peak (%)/rise in input price index from bottom topeak (%)×100.
29
The timing of the three periods differs in individual industries. For information, the bottom and peak in each industry concerning input prices are as follows.

Industry
Paper/
pulp
Chemicals

16

BottomPeak
I Q2/1996ЈQ2/1997
II Q4/1999ЈQ1/2001
III Q4/2001ЈQ1/2004
I Q1/1996ЈQ2/1997
II Q1/1999ЈQ2/2001
III Q1/2002ЈQ1/2004

Industry
Iron/steel

Nonferrous
metalsBottomPeak
I
Q3/1996ЈQ3/1997
II Q4/1999ЈQ3/2000
III Q4/2001ЈQ1/2004
I
Q3/1996ЈA3/1997
II Q1/1999ЈQ1/2001
III Q4/2001ЈQ1/2004

Development Bank of Japan Research Report/ No. 46

price.
In order to identify the relationship between
corporate production capacity and supply-demand gap, it is useful to observe the trendof the gap between potential corporate production capacity and the capacity actually utilized,
which is indexed after adjustment with the diffusion index on production capacity (hereinafterreferred to as the over-capacity/under-capacity
index). Here, the over-capacity/under-capacity
index is assumed to reflect the gap (supply-demand gap) between corporate production
capacity (supply) and the amount of productionthat corresponds to actual demand. Thus, a positive value of the index indicates over-capacity (=oversupply), whereas a negative value indicates
under-capacity (= excess demand).
Figure 3-16 shows the trend of theover-capacity/under-capacity index by industry.
Oversupply persists for the whole materials
sub-sector, as the index has remained positivesince October-December 1991, directly after the
bubble burst. However, individual industries
have different levels of over-capacity or under-capacity. The index is still positive inchemicals and non-ferrous metals, but has turned
negative in iron/steel and paper/pulp.
In order to identify the relationship between the price shifting rate and theover-capacity/under-capacity index, a comparison was made between the two indicators forthe present case (Period III) and past two cases in
the 1990s (Period I and Period II) of rising input
prices, as regards the following four materials
industries: iron/steel, paper/pulp, chemicals andnon-ferrous metals. In iron/steel and paper/pulp,
the price shifting rate rose, as over-capacity
turned into under-capacity between Period I and
Period III, or under-capacity continued throughout the three periods. In chemicals andnon-ferrous metals, on the other hand, the priceshifting rate declined, as over-capacity increased
or under-capacity turned into over-capacity. In
short, price shifting has progressed in the under-capacity industries (iron/steel and paper/pulp), which is not the case for theover-capacity
industries(chemicals
andnon-ferrous metals).
Based on this result, the relationship between output prices and output volume in each of

the over-capacity (iron/steel and paper/pulp) andunder-capacity (chemicals and non-ferrous metals) industries may be drawn as shown in Figure
3-18 in terms of supply and demand curves. In
iron/steel and paper/pulp, demand increased
mainly in China (upward movement of the demand curve from D to D’), production facilities
were consolidated with the progress of businessrestructuring and industrial restructuring (leftward movement of the supply curve from S toS’), and raw material prices went up (upward
movement of the supply curve from S’ to S’’).
The resultant excess demand led to a substantial
increase in prices. In chemicals and non-ferrous
metals, on the other hand, demand increased(upward movement of the demand curve from D
to D’), but the pressure on costs from rising raw
material prices (upward movement of the supply
curve from S to S’) was offset by the pressure forsupply increase (leftward movement of the supply curve from S’ to S”). The resultant oversupply has curtailed the impact of rising input
prices.
8. Downtrends of Input/Output Prices inProcessing & Assembly Sub-sector(see p. 44 for Figures)This section looks at the trend of input/output
prices in the processing and assembly industries.
The decline in input prices in the processing
and assembly sub-sector as a whole has slowed
and is currently being reversed (Figure 3-19). By
industry, food has made positive contributions
largely due to the increase in the price of rice,which is attributable to the poor harvest last year
caused by the unusually cool summer. The negative contribution of electrical machinery isshrinking, which may be explained by the slower
decline in input prices in electronics/communication equipment and the positive
contribution of iron/steel and non-ferrous metals.
Output prices have constantly declined since
the latter half of the 1990s in the processing andassembly sub-sector. By industry, the positive
contribution of food has been more than offset by
the negative contribution of machinery industries
in general (Figure 3-20).
Thus, the impact of rising input/output
prices in the materials sub-sector shows up as the

positive contribution of iron/steel andnon-ferrous metals. However, there are stillnegative
contributions
fromelectronics/communication equipment for electrical machinery, and from auto parts for transportationequipment. Setting aside the rise in food prices
due to extraordinary factors, input prices are
tending to decline in the processing and assembly industries. Output prices in the sub-sector are
falling in the long term, which may be attributed
to competition with imports and technologicalinnovations.
The change in corporate profits (current
profits) may be explained by four factors: (1)terms of trade (output prices/input prices), (2)sales prices, (3) sales volume, and (4) fixed
cost.30 The following section outlines the trendof the four factors in the materials and processing
and assembly sub-sectors.31
In the materials sub-sector (Figure 3-21),
the year-on-year growth of current profits has
been decreasing, finally turning negative for the
first time in six periods in the fourth quarter of2003. By factor, fixed cost continues to makepositive contribution to profits as restructuring
proceeds, and sales prices have also contributed
positively.
In contrast, the terms of trade and sales
30

Attribution to individual factors was made in the following manner according to the Cabinet Office, “Annual Reporton Japanese Economy and Public Finance (2001-2002),”
Section 1-2.
Po O  Pi I  F
 S
§
¨ O
¨
©

S
P

I

o

V
P

V

S  S

 F

i

·
¸
¸
¹

 㧔ʌ: current profits, Po: output prices, O: output, Pi: input
prices, I: input, F: fixed cost (labor cost + financial cost
+ depreciation expenses, S: sales, V: variable cost) Hence, the following relationship is obtained.
'S

I 'Po  'Pi  'Po O  I  'O Po  Pi  Pi 'O  ǻI
(1)

(2)

(3)

'F  'Po 'O  'Pi ǻI
(4)

(5)

 ((1): terms of trade factor, (2): sales price factor, (3):sales volume factor, (4): fixed cost factor, (5): confounding term)
31
Materials: textiles, pulp/paper/wood products, chemicals,
ceramics/stone/clay, iron/steel, non-ferrous metals.
Processing and assembly: food/beverages, general machinery, electrical machinery, precision machinery andtransport equipment.
Industrial classification differs between statistics. For the
purpose of the analysis, relevant data were collated andaggregated into the said industrial categories.

Development Bank of Japan Research Report/ No. 46

17volume have both made negative contributions.
The negative contribution of the former since
July-September 2002 is shrinking in the current
fiscal year, while the positive contribution of thelatter from July-September 2002 was reversed in
April-June 2003. By industry,32 the decline insales volume is largely attributable to falling
sales in chemicals. Thus, the current downward
pressure on corporate profits is the result of thedecline in sales volume.
Related to prices, attention should be paid tosales prices and the terms of trade. As describedin Section 6 of this chapter, input prices havebeen rising in the materials industries since
July-September 2002, when the terms of tradealso turned down. However, the negative contribution of the terms of trade bottomed out inJanuary-March 2003, because the rise in input
prices is currently passed on to sales prices. The
improvement is particularly significant in thechemical and paper/pulp industries. As a result ofsuch price shifting, sales prices contribute positively to corporate profits. It is true that the situation differs between industries as mentioned in
Section 6, but price shifting has been realized
more or less in the materials sub-sector as awhole. The situation becomes clearer whencompared with the processing and assembly
industries.
In the processing and assembly sub-sector(Figure 3-22), the year-on-year growth of corporate profits has also been slowing. By factor,
sales volume has made a substantial positive
contribution to profits since July-September
2002. The increase in sales volume is observedin all industries of the processing and assembly
sub-sector.33
On the other hand, there has been a negative
contribution from the terms of trade and sales
prices, which means that the price-related factors
are exerting downward pressure on profits in theprocessing and assembly industries. The negative
32

The chemical industry has the largest share in the total
sales of the materials sub-sector (in 2003) with 39.0%, followed by iron/steel with 15.3% and pulp/paper/wood products with 13.7%.
33
Electrical machinery and transport equipment has thelargest share in the total sales of the processing and assembly sub-sector (in 2003) with 34.0% and 27.4% respectively,
followed by food/beverages with 20.5% and general machinery with 13.2%.
18

Development Bank of Japan Research Report/ No. 46

contribution of the terms of trade was further
amplified in the fourth quarter of 2003, reflecting
the worsening terms of trade in electrical machinery and general machinery. As can be seenin Figure 3-19, input prices in the processing andassembly sub-sector, unlike in the materials industries, continued to decline until very recently.
The worsening terms of trade should therefore
indicate that output prices (i.e. sales prices) decline faster than input prices, and indeed, thishypothesis is supported by the fact that sales
prices have constantly made a negative contribution to profits in the processing and assembly
industries and still show no sign of improvement.
This is the case for the electrical machinery industry in particular.
Thus, the worsening terms of trade are adversely affecting profits in the processing andassembly sub-sector, as well as in the materials
industries. Unlike in the materials sub-sector,
however, the price situation in the processing andassembly industries does not show any sign ofimprovement: the processing and assembly industries do not sufficiently pass on price increases as product prices are falling faster than
input prices.
9. Impact of Worsening Terms of Trade on
Corporate Profits (Estimate)(see p. 45 for Figures)
Finally, this section estimates the impact on corporate profits of the increase in input prices resulting from rising international commodity
prices.
Rising international commodity prices affectcorporate profits by increasing corporate input
prices in the following manner. First, the rise ininternational commodity prices raises input
prices for the materials industries through theincrease in raw material cost, thus reducing corporate profits in the sub-sector (input price effect). At the same time, the rise in input prices in
the materials sub-sector makes a positive contribution to corporate profits in the sub-sector byraising output prices to pass the input price increase on to the processing and assembly industries (output price effect). In the processing andassembly sub-sector, on the other hand, the increase in output prices in the materials industriesraises input costs, thus adversely affecting corporate profits in the sub-sector (input price effect). At the same time, the rise in input prices
for the processing and assembly sub-sector
makes a positive contribution to corporate profits
in the sub-sector by raising output prices to final
products (output price effect). Thus, in both of
the sub-sectors, rising input prices influence
corporate profits both negatively (input priceeffect) and positively through price shifting to
output (output price effect). When estimating theimpact of rising input prices on corporate profits,
it is necessary to consider the net impact, offsetting the two effects against each other.
On this basis, Figure 3-23 presents an estimate of the impact on corporate profits of a 1%
increase in input prices for the materials industries. The estimate assumes that the price shifting
rate in the materials sub-sector is equal to theactual figure at the present stage of input priceincrease (46.8%) and that the price shifting ratein the processing and assembly sub-sector is zero,taking into account the traditional trend of input/output prices in the sub-sector. The result

indicates that a 1% rise in input prices for thematerials sub-sector would reduce corporate
profits by 18.6% through the input price effect,
and increase them by 11.5% through the output
price effect, resulting in a net negative impact of
7.1%. As regards the processing and assembly
sub-sector, corporate profits would be reduced
by 5.1% through the input price effect, and raised
0% through the output price effect (the priceshifting rate assumed as zero), resulting in a net
negative impact of 5.1%.
Thus, it should be noted that, although rising international commodity prices have a negative impact on corporate profits as we have seen
above, actual corporate profits are not determined solely by input prices, but through the interaction of various factors such as output prices,
output volume and cutbacks on fixed cost.
Therefore, the negative impact of rising input
prices is unlikely to exert a significant influenceon actual corporate profits, taking account of
positive factors such as the expected rise in theprice shifting rate and in sales volume as theworld economy recovers.

Development Bank of Japan Research Report/ No. 46

19

I. World Economy Led by U.S. and Asia
U.S. (1): Business Investment Rising with Personal Consumption
Figure 1-1. Trends in Real GDP(annualized change on previous quarter, %)12
Personal consumption
Net exports
GDP growth rate10
8

Residential investment
Government consumption

Change in inventories
Non residential investment

6
4
2
0
-2
-4

(CY quarterly basis)

-6
98

99

00

01

02

03

04

Source : U.S. Department of Commerce, “National Income and Product Account.”

Figure 1-2. Personal Consumption Trends(1985=100)(annualized change on previous quarter, %)

15
10
5
0
Disposable income factor
Consumption propensity factor
Personal consumption
Consumer confidence index (right scale)-5(CY quarterly basis)

-10
98

99

00

01

02

03

150
140
130
120
110
100
90
80
70
60
50

04

Source : U.S. Department of Commerce, “Personal Income and Outlays.”

Figure 1-3. Trends in Real Business Investment and Corporate Profits(annualized change on previous quarter, %)25(annualized change on previous quarter, %)IT-related (hardware)
Buildings
Overall business investment

20
15

50

IT related (software)
OthersCorporate profits (right scale)

40
30

10

20

5

10

0

0

-5

-10

-10

-20
-30

-15
(CY quarterly basis)

-20
98

99

00

01

Source: U.S. Department of Commerce, “National Income and Product Account.” 21 

02

03

04

-40

U.S. (2): Recovery in Production and Employment, Attention Focused on
the Timing of Rate Increase
Figure 1-4. Industrial Production Index andCapacity Utilization in Manufacturing
㧔1997=100㧕
125

Figure 1-5. Change in Number of Employees andUnemployment Rate

(%)
100

(%)
8

Mining/construction
Services, etc.

95

120

(change on previous quarter, 10,000 persons)
150
Manufacturing
Government

100

7

50

6

0

5

90
115
85
110
80
105

Changes in thenumber of
employees-50

75

Unemployment rate (right scale)

100

70
98

99

00

01

02

4

-100

3

03
04
(CY quarterly basis)

98

Manufacturing capacity utilization (right scale)Composite index
Consumer goods
Equipment

99

00

01

02

03
04
(CY quarterly basis)

Note :The number of employees represents monthly
average for the non-agricultural sector.
Source : U.S. Department of Labor, “Employment Situation.”

Source : FRB, “Industrial Production and Capacity Utilization.”

Figure 1-6. Current Account Balance(annualized rate, $100 million)
2,000
1,000
0
-1,000-2,000-3,000-4,000-5,000-6,000-7,000(change on previous year, %)(change on previous year, %)

(%)
0

30

6
CPI

-1

4

-2

Net transfer-3

Balance on income-4

Balance on services
Balance on goods-5

Current accountbalance/GDP(right scale)-6

95 96 97 98 99 00 01 02I/03㸈 㸉 㸊I/04(Annual basis)

Figure 1-7. Prices

PPI (raw materials)(right scale)

20

2

10

0

0
-10

-2
PPI (intermediate goods)

PPI (final goods)
-20

-4
98

(CY, quarterly basis)

99

00

01

02

03

04

(CY, quarterly basis)

Note : Annual data to 2002. Annualized quarterly data since 2003.
Sources : U.S. Department of Commerce, “Balance of Payment” and“US International Trade in Goods and Services.”

Note : Core index excluding food and energy.
Sources : U.S. Department of Labor, “Producer Price Index” an“Consumer Price Index.”Figure 1-8. Stock Market Indexes

Figure 1-9. Long- and Short-term Interest Rates($)(points)

(%)

3,000

11,000

6
5

10,00010-yeargovernment bonds

2,500

Dow Jones

4

2,000

9,000
8,000

1,500

Nasdaq Composite
Index (right scale)2

FF target rate

1

1,000

7,000
1/02 4/02 7/02 10/02 1/03 4/03 7/03 10/03 1/04 4/04

(day basis)

Sources :30
1/02 4/02 7/02 10/02 1/03 4/03 7/03 10/03 1/04 4/04
(day basis)

Sources : FRB data; Wall Street Journal.

Dow Jones; DRI database.

 22 

Economies of Major European Countries (Germany, France, U.K.): Further Recovery

Figure 1-10. Real GDP of Major European Countries(annualized change from previous quarter by component)(%)(1) Germany(1995 as base year)10

0.9 1.0

5

1.8

0
-5

ً0.7

-10
97
(%)

98

99

00

01

02

03

(2) France

04(1995 as base year)

10

2.4

5

2.5 3.1

0
ً1.5

-5
97
(%)

98

99

00

01

02

03

(3) U.K.

04(2000 as base year)

10
3.4

5

3.7

3.0

0
-5
(CY quarterly basis)-10
Private consumption
Fixed capital formation
GDP

Government consumption
Exports

Inventories
Imports (reverse sign)

Sources : Statistisches Budesamt (StBA), Direction Générale de l’Institut National de la Statistique et des Etudes Economiques (INSEE) andU.K. Central Statistical Office data.

Figure 1-12. Trend of Unemployment Rate

Figure 1-11. Industrial Production Index in Major
European Countries(change on previous year %)

(%)

3

12
Germany
France
U.K.

11

2

10
1

9

0

8
7

-1
Germany
France
U.K.

-2

6
5

-3

4
96

97

98

99

00

01

02

03

04

99

Note :
Based on seasonally adjusted values.
Sources : StBA, INSEE and U.K. Central Statistical Office data.

00

01

02

03

04

(monthly basis)(CY quarterly basis)
Notes :

1. Unemployment rate is based on ILO standard forthe purpose of international comparison.
2 Based on seasonally adjusted values.
Source : OECD

 23 

Economies of Major Asian Countries (Korea, Tawan and Singapore):
Export-led Recovery, Slumping Consumption in Korea
Figure 1-13. Real GDP Growth Rate
Korea

(%)

20

Taiwan(%)

15

Singapore

(%)

20

7.5

15

15

10
6.3

10
3.9

10
5

5

0

5
0

-5

0

-10

-5

-5

-15
(CY quarterly basis)

-10
99

00

01

02

03

04

Fixed capital formation
Errors(CY quarterly basis)

-10
99

00

01

Private consumption
Change in inventories

02


03

00

01

02

03

04

Net exports
㧑

Figure 1-15. Price Inflation

(%)
40

6
Korea
TaiwanSingapore

20

99

Government consumption
GDP

Figure 1-14. Manufacturing
Sector Production Index

30

04(CY quarterly basis)

-20

(%)

4
2
0

10

Korea
TaiwanSingapore

-2
-4

0

99

00

01

(CY quarterly basis)

02

03

04

-10
-20

Figure 1-16. Number of Credit Card
Defaulters in Korea(CY quarterly basis)-30
99

Notes :

Source :

00

01

02

03

04

1. Growth rates represent year-on-year.
2 Figure 1-16 is based on data published by the Korea
Federation of Banks. Credit card defaulters refer to those
whose arrears amount to 300,000 won or over for threemonths or longer.
National statistics

10,000 (persons)
(%)
300
250
200
150
100
50
0
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3
03
Number of credit card defaulters
‫ޓޓޓ‬‫ޓޓޓޓ‬04(Monthly basis)

Share of credit card defaulters in troubled debtors(right scale) 24 

70
65
60
55
50

China (1): Increased Concern of Overheating – Difficulty of Controlling Fixed Asset Investment

Figure 1-18. Composition of Investment
Completed (1)Figure 1-17. Real GDP Growth(trillion yuan)

(%)
14
12
10
8
6
4
2
0
-2
-4

(%)

6
9.8

50
43.0

5

40

4

30

26.7

3

20

2

10

1
0

0
㸇 㸈 㸉 㸊 㸇 㸈 㸉 㸊 㸇㸇 㸈 㸉 㸊 㸇 㸈 㸉 㸊 㸇

98 99 00 01 02 03

02
Fixed capital formation
Government consumption
Net exports

03

99 00 01 02

04

Total

Private consumption
Change in inventories
Growth rate

Figure 1-19. Composition of Investment
Completed (2)< In d u strie s w ith la rg e s t c o n trib u tio n >C h an g e o n
p r ev io u s ye ar

M a n u fa c tu rin g

7 5 .8 %1 ) M eta ls2 ) C h e m ic a ls

3 6 .3 %1 0 8 .4 %8 .7 %

1 4 .1 %7 3 .3 %6 .0 %

7 .9 %

N o n -m a n u fa c tu rin g

3 9 .5 %7 2 .8 %6 3 .7 %1 ) R e a l esta te

3 9 .8 %2 9 .2 %2 5 .7 %5 3 .1 %< P ro v in c e s w ith la rg e s t c o n trib u tio n >C h an g e o n
p r ev io u s ye ar

9 .2 %

03

04

Change on previous year (right scale)(trillion yuan)
5

C o n trib u tio n

2 7 .2 %2 ) P o w e r/g a s/w a te r

02

Figure 1-20. Composition of Investment
Completed (3)(Ja n . - M a r. 2 0 0 4 )S h a re

03

(%)
90

4

85

3
80
2

9 .8 %(Ja n . - M a r. 2 0 0 4 )S h a re1 ) Jia n g su

6 6 .2 %1 2 .8 %1 7 .7 %2) Shandong

6 2 .2 %7 .0 %

9 .1 %3 ) Z h e jia n g

4 7 .3 %9 .0 %

8 .9 %

(%)

70

0
99

00
01
02
Local projects
Central projects
Share of local projects (right scale)03

Figure 1-22. Exports and Imports

Figure 1-21. Retail Sales of Consumer Goods(trillion yuan)
5

75

1

C o n trib u tio n(million dollars)
11 5,0004

10 4,000

3

9

2

8

(%)
60
50
40

1

3,000

30

2,000

20

7

10
1,000

0

0

6
98 99 00 01 02 03
Amount

02

03

04

0

-10
98 99 00 01 02 03

Change on previous year (right scale)

Exports
Export growth (right scale)Note : The growth rate represents change on the previous year.
Sources : IMF, “International Finacial Statistics,” China Statistical
Yearbook, China Monthly Economic Inicators and People's
Bank of China data.

 25 

02

03

04

Imports
Import growth (right scale)China (2): Growing Inflationary Trend and Limitations of Credit Controls

Figure 1-23. Price Indexes

Figure 1-24. Financial Indicators(change on previous year, %)(change on previous year, %)
10

25

8
6
20

4
2
0

15

-2
-4

June 13 : Control tightened onloans for real estate.

(monthly basis)-6

December 21 : Interest
rate reduced on excess
reserves.
January 1 : Cap on
lending rate raised.

September 21 : Deposit
reserve requirement
raised.

10
1
02

3

5

7

9

11

1
03

3

5

7

9

11

1
04

3

1
02

3

5

7

9

11

1
03

3

5

7

9

11

1
04

Consumer price index
Raw Materials price index
Ex-factory price index of industrial products
Real estate selling price index (quarterly basis)

Growth rate of M2
Growth rate of loans by all financial institutions

Figure 1-25. Financial Policy of Chinese
Government

Figure 1-26. Trend of Inter-bank
Interest Rates

3

(%)
2003.

6.13 Circular to tighten control on loans for real estate.

3.2

9.21 Deposit reserve requirement raised (6.0% to 7.0%).

3.0
2.8

12.21 Interest rate reduced on excess reserves (1.89% to 1.67%)
2004.

2.6

1. 1 Cap on lending rate raised.

2.4

3.25 Interest rate on loans for financial institutions raised
by 0.63%.

2.2

4.25 Deposit reserve requirement raised (7.0% to 7.5% forgeneral financial institutions).

2.0

Higher rate required for institutions with low capital
adequacy (7.0% to 8.0%).

(monthly basis)

1.8
1
02

3

5

7

9

11

1
03

3

5

7

9

11

1
04

Inter-bank rate (seven days)
Inter-bank repo rate on bond purchase (seven days)

Figure 1-27. Dilemma on Rate Increase
Rate increase
Overheated
investment

Widened rate gap with dollar
Accelerated inflow of foreignexchange (dollar)

Excessive liquidity
Sources : China Monthly Economic Indicators; People’s Bank of China data.

 26 

Pressure for RMB appreciation,intervention to support dollar

3II. Japanese Economy: Gradual Recovery Continues
Overview: Recovery Continuing as World Economy Bounces Back
Figure 2-1. Trends in Real GDP(annualized rate of change from the previous quarter by component, seasonallyadjusted)

(%)
12

2/91

10

10/93

5/97

1/02

10/00

1/99

Government
consumption

Quarter-on-quarter change in GDP

8

Exports

6

Inventory investment

4

Private consumption

2

Business investment
Public investment

0-2

Imports(reverse sign)

-4
-6
-8
-10

(CY quarterly basis)

Residential investment-1290Notes :

91

92

93

94

95

96

97

98

99

00

01

02

03

04

1. 1995 as base year.
2. Contribution to annualized GDP is prorated to each item based on its share in contribution before annualization. Government
consumption includes the contribution of public inventories.
Cabinet Office, “National Accounts.”

Source :Figure 2-2. Trends in Production Indicators(seasonally adjusted)
Change in shipments on previous year (%)

10/00

1/99

5/97

Figure 2-3. Inventory Cycle (total of mining
and manufacturing sector)(1/02)

115
Tertiary industry activity index(1995=100, weight: 59.5%)

110
105

Industrial production index(2000=100, weight: 22.4%)

100
95
90
85

10

1-3/0410-12/02

5

10-12/03

7-9/02
4-6/03

7-9/030
4-6/02
1-3/99

-5

-10

80

4-6/01

1-3/02

7-9/01
10-12/01

Construction activity index(1995=100, weight: 8.1%)

75

10-12/00
4-6/97

1-3/03-15(CY quarterly basis)

70

-15

-10

-5

0

5

10

Change in inventories on previous year (%)

Notes :

98

99

00

01

02

03

04

1. Weights represent shares in all-industry activity index (GDP from the supply side)
and add up to 100 in sum with the agriculture, forestry and fishery production
index (weight: 1.8%) and public service activity index (8.2%).
2 The industrial production figures for April-June 2004 represent the average of
estimates for April and May based on the Survey of Manufacturing Production
Forecast.

Change in shipments on
previous year (%)

97

Concept
Buildup

45-degree
Unintended
accumulation

Recovery
Adjustment
Change in inventories on previous year (%)

 27 

Harsh but Partially Improving Employment Situation
Figure 2-4. Trends in Ratio of Job Offers
to Applicants and Unemployment Rate

Figure 2-5. Number Unemployed byDuration of Joblessness
6(10,000 persons)
500

0.7

5

400

0.6

4

300

0.5

3

200

2

100

1

0

(times)
0.8

(%)

(%)

40
30
20

0.4

10

(CY quarterly basis)

0.3
97

98

99

00

01

02

03

0

04

2 2 2 8 2 8 2 8 㸇 㸈 㸉 㸊 㸇 㸈 㸉 㸊
02
03
97 98 99
00
01

Ratio of job offers to applicants
Unemployment rate (right scale)Note :
Sources :12 months or longer
6-12 months
3-6 months
Less than 3 months
Share of 12 months or longer (right scale).
Note :

Seasonally adjusted.
Ministry of Public Management, Home Affairs, Posts andTelecommunications, “Labour Force Survey;” Ministry of Health,Labour and Welfare, “Statistics on Placement Activities.”

Annual survey until 1998, and semiannual survey for 1999-2001.
Quarterly average of monthly survey since 2002.
Ministry of Public Management, Home Affairs, Posts and Telecommunicatio“Labour Force Survey: Detailed Tabulation (former Special Survey).”

Source :Figure 2-6. Trend of Year-on-Year Change in Number of Workers and Employees by Component(1) By industry (new industrial classification)(2) By status(10,000 persons)100(10,000 persons)
110

50

60

0

10

-50

-40

-100

-90

-150

(CY quarterly basis)(CY quarterly basis)
-140
99

00

01

Construction
Wholesale and retail trade
Services
Total

02

03

04

97

98

99

00

01

02

03

04

Employees (temporary and daily)
Employees (regular)
Self-employed and family workers
Total number of workers

Manufacturing
Transport
OthersFigure 2-7. Overtime Hours(seasonally adjusted)(3) By size of corporation (excluding agriculture,
forestry, fisheries and government)(10,000 persons)(index, 2000=100)

115
100

500 employees or over
30-499 employees
1-29 employees
Total

50

All industries
Manufacturing

110
105
100

0

95
90

-50

85

(CY quarterly basis)-100(CY quarterly basis)

80
97

98

99

00

01

02

03

04

Source : Ministry of Public Management, Home Affairs, Posts andTelecommunications, “Labour Force Survey.”

97

98

99

00

01

02

03

04

Source : Ministry of Health, Labour and Welfare, “Monthly Labour
Survey.” 28 

Little Improvement in Wages
Figure 2-8. Year-on-Year Change in Wages andSalaries per Person
4

Figure 2-9. Spring Wage Increases and Change
in Bonuses on Previous Year

䇭

(%)

4
Bonus and special earnings
Overtime pay
Regular wages and salaries
Total wages and salaries

3
2

(%)
2.21

2

2.90

0

-4

-1

-6

-2

-8
97
Notes :(CY quarterly basis)

-4
00

01

02

03

04

Note : Business establishments with five or more employees.
Source : Ministry of Health, Labour and Welfare, “Monthly Labour
Force Survey.”

99

00

01

02

03

04

Summer bonus and year-end bonus include wages and salaries paid as such in JuneAugust and November-January respectively in business establishments with fiveor more employees.
2. Spring wage increases cover listed companies with trade unions employing 1,000
or more workers and capitalized at ¥2 billion or over.
Spring wage increases (Nippon Keidanren) represent preliminary tabulation values
3(112 major corporations, as of April 21).
Sources : Ministry of Health, Labour and Welfare, “Monthly Labour Statistics,” and “Spring
Wage Increase Requests and Settlement Conditions for Major Private Corporations;”
Nippon Keidanren, “Response in Spring Labor Negotiations.”

Figure 2-11. Nominal Living Expenditureof All Households(year-on-year change by component)(¥trillion)
330

(%)

98

(FY)

1.

Figure 2-10. Consumption on GDP Basis4

1.63

Summer bonus
Year-end bonus
Spring wage increases
Spring wage increases (Nippon Keidanren)

-3

99

1.66

1.62 1.59

-2

98

2.01

0

1

97

2.06

2.66

(%)
2

320

0

310

3
2
1

-2

300

-4

290

-1

-6

280

-2

Real private final consumption expenditure
Change on previous year

-8

0

-3
270
-4

-10

260
97

98

99

00

01

02

03

04

-5
98

(CY quarterly basis)

99

00

01

02

03

04

(CY quarterly basis)

Notes :

1. Seasonally adjusted annual rate.
2. Data since January-March 2000 are calculated with
the new quick estimate method. Growth rates forthe periods prior to the change in calculation method
are on a confirmed information basis.
The levels of consumption are calculated
retrogressively from the growth rates.
Source : Cabinet Office, “National Accounts.”

Food
Fuel, light & water charges
Clothes and footwear
Transportation & communication
Reading & recreation
Total living expenditure

Housing
Furniture & household utensils
Medical care
Education
Others

Source : Ministry of Public Management, Home Affairs, Posts andTelecommunications, “Family Income and Expenditure
Survey.” 29 

Retail Sales Showing Slight Recovery as Consumer Sentiment Improves
Figure 2-12. Retail Sales Index(seasonally adjusted)

Figure 2-13. Sales of Registered New Cars(change on previous year by component)

㧔1Q/97=100㧕

Textiles, clothing, personal
items, foods and beverages

(%)

15
10

105

5
0
-5
-10

100
Householdmachines/appliances95

Standard-sized
Light

-15
-20
-25

Retailindustry total

90

Small-sized
Passenger car total(CY, quarterly basis)

97

98

99

00

01

02

03

04

Note : Data covers passenger cars including light vehicles.
Source : Japan Automobile Dealers Association

85

Figure 2-14. Tourism Sales(change on previous year)80
Automobiles

(%)

75

80
60

Overseas tours
Internal tours

40

70
97

98

99

00

01

02

03

20

04

0

(CY quarterly basis)-20-40
Retail sales index except for total represents the average-60of published seasonally adjusted figures weighted
97
98
99
00
01
02
03
04
by the sales of each industry.
Source : Ministry of Economy, Trade and Industry, “Report of(CY quarterly basis)
the Current Survey of Commerce.”
Source : Ministry of Land, Infrastructure and Transport,

Note :“Tourism Sales of 50 Major Tourist Agencies.”

Figure 2-15. Consumer Confidence Indicators(2) Other Confidence Indexed(1) Quarterly change in consumer confidence index
6

(%)

180

4

160

2

140

0

120

-2

100

-4

80

Living Insecurity Index-6

Improvement
Nikkei Consumption Forecast Index

Improvement

60
97

98

99

00

01

Employment
Willingness to buy durable goods
Price inflation
Income growth
Overall livelihood
Consumer confidence index

02

03

04

97

98

99

00

01

02

03

04

(CY quarterly basis)(CY quarterly basis)
Note :

Consumer confidence index is based on surveys forthe coming six months. Figures for individual components were redistributed from seasonally adjusted data.
Sources : Cabinet Office, “Consumer Confidence Survey;” Japan
Research Institute, “Consumer Sentiment Index;” Nikkei
Industrial Consumption Research Institute data.

 30 

Business Investment Increasing, with Good Prospects in Manufacturing
Figure 2-16. Year-on-Year Change in Nominal Business Investment and Investment Profitability
in Manufacturing Sector (corporations of all sizes)
5/97

(%)

10/00

1/99

(%)

1/02

15

10

10

9

5

8

0

7

-5

6
Contribution of non-manufacturing
Contribution of manufacturing
Year-on-year change in business investment
Investment profitability in manufacturing (right scale)

-10
-15

5
4
(CY quarterly basis)

-20
95

96

97

98

99

00

01

02

3

03

Notes :

1. Business investment excludes software.
2. Return on investment = operating asset-profit rate – average contracted interest rates of banks (new loans, total),
where operating asset-profit rate = operating profit/(tangible fixed assets + inventories).
Sources : Ministry of Finance, “Quarterly Report of Statistical Survey of Incorporated Enterprises,” etc.

Figure 2-17. Capital Stock Cycle(Manufacturing)
Year-on-year change in investment in
new plants and equipment (%)

30

Figure 2-18. Capacity Utilization Index(%)

15

10-12/03

Production (=year-on-year change in capacity utilization rate – capacity)
Capacity (= year-on-year change in capacity index)
Year-on-year change in capacity utilization rate

1-3/91

20

10

10

5

0

0

-10

-5

-20

-10
-15

-30
-2 -1

0

1

2

3

4

5

6

7

8

9

96

10

97

98

99

00

01

Source : Cabinet Office, “Gross Capital Stock of Private Enterprises.”04

Figure 2-20. Capacity Utilization Index and
Diffusion Index of Production Capacity(seasonally adjusted, 2000=100)

12

115

20

8

110

10

4

105

30

03

Source : Ministry of Economy, Trade and Industry, “Industrial Index.”Figure 2-19. Trend of Leading Indicator andActual Business Investment(change on previous year)(%)

02(CY quarterly basis)

Year-on-year change in capital stock (%)(reversed scale, “excessive” – “insufficient,” %)-5
Diffusion index of production capacity in non-manufacturing (right scale)

0510Manufacturing capacity utilization index

0

0

100

-10

-4

95

-20

-8

90

-30

-12

15
20
25

95

96

97

98

99

00

01

02

03

30
Diffusion index of production capacity in manufacturing (right scale)

85

04

96

(CY quarterly basis)

97

98

99

00

01

35
02

03

(CY quarterly basis)

Machinery orders (right scale)
Growth of business investment by incorporated enterprises
Note :
Sources :Machinery Orders for April-June 2004 represent estimates.
Cabinet Office, “Orders Received for Machinery;” Ministry of Finance,“Quarterly Report of Statistical Survey of Incorporated Enterprises.”04

Note :
Sources : 31 

The diffusion index of production capacity has a discontinuity due toa revision to its coverage in March 2004.
Ministry of Economy, Trade and Industry, “Industrial Index;” Bank ofJapan “Short-term Economic Survey of Enterprises in Japan (Tankan ).”Residential Investment Slumping but Bottoming out
Figure 2-21. Trend of Housing Starts(seasonally adjusted annual rate)(10,000 units)
160(%)
Owner-occupied houses
Company’s houses
5

140

Figure 2-22. Housing Starts(trend of year-on-year change
by component)

Housing for rent
Housing for sale

5

120
100

-5

80
Housing for saleCompany’s houses
Housing for rent
Owner-occupied houses
Total

60

-15

40
20

(CY quarterly basis)(CY quarterly basis)

-25

0
97

98

99

00

01

02

03

97

04

98

99

00

01

02

03

04

Source : Ministry of Land, Infrastructure and Transport,“Building Construction Started.”

Source : Ministry of Land, Infrastructure and Transport,“Building Construction Started.”

Figure 2-23. Floor Area of Housing Starts(trend of year-on-year change by component)

Figure 2-24. Real Residential Investment(seasonally adjusted annual rate)( trillion yen)

(%)

28

10
26
0

24
22

-10
Housing for saleCompany’s houses
Housing for rent
Owner-occupied houses
Total

-20

20
18
(CY quarterly basis)(CY quarterly basis)

-30

16
97

98

99

00

01

02

03

04

97

Source : Ministry of Land, Infrastructure and Transport,“Building Construction Started.”

99

00

01

02

03

04

Source : Cabinet Office, “National Accounts.”

Figure 2-25. Contract Rate and Stock of
Condominiums (Tokyo metropolitan area)(%)

98

Figure 2-26. Contract Rate and Stock of
Condominiums (Kinki area)(%)(1,000 units)

50
40
30

12

60

10

40

8

20

6

0

4

-20

2

-40

0

-60

(1,000 units)
8
7
6

20
10
0
-10

5
4
3
2

-20
-30

(CY quarterly basis)(CY quarterly basis)

-40
97

98

99

00

01

02

03

04

1
0

97

98

99

00

01

02

03

04

Termp-end stock (right scale)
Change in marketed units on previous year

Term-end stock (right scale)
Change in marketed units on previous year

Note :

Contract rate refers to the quarterly average of the percentage of housing sales contracts that were actually closed from among
the total number of contracts started for any given month. Stock refers to the figure at the end of the quarter.
Source : Real Estate Economic Institute Co., Ltd.

 32 

Public Investment Falling due to Difficult Financial Situation
Figure 2-27. Public Investment and Government
Consumption

Figure 2-28. Trend of Contract Value for
Public Works(change on previous year, %)25(As % of GDP)
20

CentralOthers20
Government final consumption

Local
Total

15
10
15
5
0
Public fixed capital formation

-5

10

-10
-15
-20

5

(quarterly basis)

(FY)

-25
91 92 93 94 95 96 97 98 99 00 01 02 03 04

91 92 93 94 95 96 97 98 99 00 01 02 03(CY quarterly basis)
Note :
Data represent seasonally adjusted annual rate.
Source : Cabinet Office, “National Accounts.”

Note :

Source :Figure 2-29. Long-term Outstanding Debts ofCentral and Local Governments㸊㸇㸈㸉㸊㸇
02 03
04

In the legend, “Local” represents the total of prefecturesand municipalities. “Others” represent the total ofcentral and local public business entities.
East Japan Construction Surety etc., “Public Works
Prepayment Surety Statistics.”

Figure 2-30. International Comparison of
Financial Situations(trillion yen)
Japan
U.S.
EU15
(%)
200
(1) General government debts/Nominal GDP
Forecast
175
150
125
100
75
50
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
(%)
10

800
700

‫ޓޓޓޓ‬

600
500
400
300
200
100

5

0
(FY)

-100

91 92 93 94 95 96 97 98 99 00 01 02 03 04
Duplication
Debts of local governments
Debts of central government
Excluding special account for postal services and postal savings
Total

Notes :

1. Figures for fiscal 2004 represent estimates after
supplementary budget and those for fiscal 2003 are
estimates based on the initial budget.
2. The special account for postal services and postal
savings (outstanding debts of some ¥49 trillion asat the end of FY2002) was abolished at the end of
FY2002.
Source : Ministry of Finance, “Budgetary Data (January 2004).”(2) Primary balance/Nominal GDP

Forecast

0-5-10(Calendar year)
Notes :

Source : 33 

1. Values for 2003 are estimates.
2. Figures for some European countries in 2000 include income
from the selling of cellular phone licenses (around 1% of
the primary balance).
OECD, “Economic Outlook 74 (December 2003).”

Yen Strengthening in PPP, Euro’s Presence Felt
Figure 2-31. Trends of Real Effective
Exchange Rate

Figure 2-32. Japan’s Purchasing Power Parity and
Yen/Dollar Rate

(95=100)

150
140
130
120
110
100
90
80
70

(yen)

210
190
170
150
130
110
90
70
50

Currency appreciation
U.S.

Japan

97

98

99

00

01

Euro

02

03

04

Purchasing
power parity

Yen/dollar rate

90 91 92 93 94 95 96 97 98 99 00 01 02 03(Monthly basis)(Calendar year)

Source : IMF

Source : OECD, “Purchasing Power Parities and Real Expenditure.”

Figure 2-34. Exchange Intervention and Foreign
Exchange Reserves(¥ trillion)
35
30
25

ᄖ⽻ᄁࠅ
Foreign currencies sold
Foreign currencies boughtsold
ᄖ⽻⾈޿

20
15
10
0
-5
92 93 94 95 96 97 98 99 00 01 02 03(FY)

Supporting
domestic currency

5
Supporting
domestic currency(foreign exchange reserves, $100 million)(amount of intervention, ¥ trillion)
Supporting foreign
currencies

Supporting foreign
currencies

Figure 2-33. Amount of
Exchange Intervention
8
7
6
5
4
3
2
1
0
-1
-2
-3

ᄖ⽻ᄁࠅ
Foreign currencies sold
ᄖ⽻⾈޿Foreign currencies bought
Foreign exchange reserves (right scale)ᄖ⽻Ḱ஻㧔ฝ⋡⋓㧕(monthly basis)

1
97

7

1
98

7

1
99

7

1
00

7

1
01

7

1
02

7

1
03

7

9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0

1
04

Source : Ministry of Finance

Figure 2-35. Share of U.S. Dollar in Japanese
Merchandise Trade

Figure 2-36. Composition of World Foreign
Exchange Reserves by Currency
(%)

(%)

(%)

71 10054
Imports (right scale)

53

70

80

52

69

51

68

60

50

67

40

49
48

66
Exports (left scale)

65

47

64
2nd half 1st half
12
13

2nd

1st half
14

13.0

13.2

14.6

Euro
67.9

67.6

67.7

64.8

99

00

01

02

0

1st half 2nd15(CY, semiannual basis)(CY, year-end basis)

Source : IMF, “Annual Report 2003.”

 34 

Others
Yen

20

2nd

Source : Ministry of Finance, “Composition of Merchandise Trade by
Currency.”

12.6

U.S.
dollar䇭

Exports and Imports Increasing, Current Surplus Rising
Figure 2-37. Export and Import Volume IndicesFigure 2-38. Export Value by Region(2000=100)(change on previous year, %)

20

120
115
110
105
100
95
90
85
80
75

Imports

China
U.S.
Others

15
10

Asia
EU
Composite index

50-5Exports(monthly basis)-10(CY quarterly basis)

-15
98

99

00

01

02

03

99

04

Source : Ministry of Finance, “Trade Statistics.”

00

01

02

03

04

Note :
Asia excludes China.
Source : Ministry of Finance, “Trade Statistics.”

Figure 2-39 Exports and Imports by Type of Industrial Goods(Import supply)(Export shipments)(seasonally adjusted change from previous quarter, %)(seasonally adjusted change from previous quarter, %)

10
8
6
4
2
0
-2
-4
-6
-8

6
4
2
0
-2
-4
(CY quarterly basis)(CY quarterly basis)

-6
98

99

00

01

02

03

Capital goods
Consumer non-durables

04

98

99

Construction materials
Producer goods

00

01

02

03

04

Consumer durables
Total

Source : Ministry of Economy, Industry and Trade, “Analysis of Industrial Production Activities.”

Figure 2-40. Current Account Balance

Figure 2-41. Balance of Payments and Change in
Foreign Exchange Reserves(annual rate, ¥ trillion)(annual rate, ¥ trillion)

80
60
40
20
0
-20
-40
-60
-80

25
20
15
10
5
0
-5
-10
98

99

00

01

02

03

04

98

99

00

01

02

Trade balance
Income balance
Current account balance

Service balance
Current transfers

Note :
Seasonally adjusted.
Sources : Ministry of Finance; Bank of Japan, “Balance of Payments.”

03

04(CY quarterly basis)(CY quarterly basis)
Current account balance
Change in foreign exchange reserves

Note :

Capital account balance䇭

Seasonally adjusted figures for current account balance.
Raw data for others.
Sources : Ministry of Finance; Bank of Japan, “Balance of Payments.”

 35 

Easy Money Policy Remains
Figure 2-42. Trends in Selected Interest Rates
2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0

Figure 2-43. Target of Guidance by Monetary Policy(¥100 billion)
14,000(¥ trillion)
35

(%)

30

12,00025

10,000

20

8,000

15

6,000

10

4,000

5

2,000

0
1 4
00

Note :

Sources :0
3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3
01
02
03
04
BOJ current account balance
Government bond purchase operation (right scale)

7 10 1 4 7 10 1 4 7 10 1 4 7 10 1
01
02
03
04
Inter-bank overnight lending rate
Three-month CDs
Yield on 10-year government bonds
Average contracted interest rate on new loans

Notes :

Average contracted interest rate on new loans is based on monthly
statistics. Others represent the monthly averages of daily closing
prices.
Nihon Keizai Shimbun; Bank of Japan, “Financial and Economic
Statistics Monthly.”

Source :Figure 2-44. Trends in Monetary Base andMoney Stock Rates

Figure 2-46. Diffusion Index of Lending
Attitude of Financial Institutions(“accommodative” – “severe,” % points)(change on previous year,%)
35
30

40

Monetary base
Money stock (M2+CD)

25

1. BOJ current account balance represents monthly average balance.
2. Government bond purchase operation represents the amountpurchased in the month.
Bank of Japan, “Financial and Economic Statistics Monthly.”

Large-sized corporations
SMEs
♽೉3

30
20

20
15

10

10

0

5

-10

0

-20

-5
94

Source :

95

96

97

98

99

00

01
02
03
04
(CY quarterly basis)

-30
㸇
96

Bank of Japan, “Financial and Economic Statistics Monthly.”
Note :

Figure 2-45. Private Bank Loans
Source :(year-on-year change in average outstanding loans, %)

3
2
1
0
-1
-2
-3
-4
-5
-6
-7

Private bank loans
After adjustments for extraordinary factors(monthly basis)

97
Note :

Source :

98

99

00

01

02

03

04

Adjustments for extraordinary factors include adjustments forfluctuation caused by the mobilization or amortization of
credited loans.
Bank of Japan, “Financial and Economic Statistics Monthly.” 36 

㸇
97

㸇
98

㸇
99

㸇
00

㸇
01

㸇
㸇
㸇
02
03
04
(CY quarterly basis)

The diffusion index of lending attitude of financial
institutions has a discontinuity due to a revision to its
coverage in March 2004.
Bank of Japan, “Short-term Economic Survey of Enterprises
in Japan (Tankan ).”III. Impact of Rising International Commodity Prices on Corporate
Input/Output Behavior
Input/Output Behavior by Industrial Sector and Price Transmission Process

Figure 3-1. Framework of Analysis

Upstream sector(resource)
Prices: international commodity priceindex(Figures 3-3, 3-4 and 3-5)
corporate goods price(raw materials)(Figure 3-10)

Midstream sector(process)

Downstream sector(demand)Prices:Prices: corporate goods price(intermediate goods)(Figure 3-10)

Production
facilities(supply side)

Naturalresources

Inputs to midstream sector(Examples: natural resources)· Iron ore· Coal· Limestone· Chip· Waste paper· Crude oil (Figure 3-2)

Final demand(demand side)

Inputs to downstream sector(outputs of midstream sector)

Output/input prices (materials
industries in manufacturing)(Figures 3-13 and 3-14)

Outputs of downstream sector

Output/input prices (processing & assembly
industries in manufacturing)(Figures 3-19 and 3-20)(Examples: production facilities)· Chemicals: resin plants· Iron/steel: steel mills· Paper/pulp: paper mills· Non-ferrous metals: refining plants· Cement/ceramics/glass: cement kiln plants· Coal/oil: refineries

Upward pressure on prices

 37 

corporate goods price (final goods)(Figure 3-10)
corporate service prices(Figure 3-12)
consumer prices(Figure 3-11)(Examples: final demand)· World demand· Construction demand· Consumer/industrial demand· Gasoline demandUptrend Continues in International Commodity Markets

Figure 3-2. Crude Oil Price(Dubai spot)

Figure 3-3. International Commodity Price
Index(1995=100)($/barrel)
35

200

30
160
25
120

20
15

80

10

All commodities
MetalsAgricultural products
Beverages
Food
Energy

40
5
0

0
96

97

98

99

00

01

02
03
04
(monthly basis)

96

(%)
25

50

20

40

15

30

10

20

5

10

0

0

-5

-10

-10

-20

-15

-30

-20
98

99

00

01

02

03

96

04

00

01

02

03

04

97

98

99

00

01

02

03

04

(CY quarterly basis)(CY quarterly basis)
MetalsBeverages
Energy99

Figure 3-5. Year-on-Year Change inInternational Commodity Price Index(excluding energy)

(%)
60

97

98

(CY quarterly basis)

Figure 3-4. Year-on-Year Change in International
Commodity Price Index(all commodities)

96

97

Agricultural products
Food
All commodities

Sources : IMF, “International Financial Statistics” and other data.
 38 

Food
Beverages
Agricultural products
MetalsAll commodities (excluding energy)

China’s Rising Share in World Imports
Figure 3-6. International Commodity Prices and Imports of China
Steel(10,000t)
400

Import volume (steel)
Scrap iron (right scale)

350

190

300

300

(1t, $)

Plastic(10,000t)(1t, $)
350

1000

Import volume (plastic)

900

Polystyrene resin (right scale)

170

800

250

150

200

130

600

150

110

500

100

90

700

250
200
150
100
01

02

03

03

04
(monthly basis)

Composition of world chemical imports by country
1990
2000
2002
50.6%
41.7%
43.5%
EU (*)
7.7%
12.5%
13.0%
U.S.
2.2%
5.0%
5.7%
China
5.0%
4.3%
3.8%
Korea
2.5%
3.3%
3.2%
Canada(*) Includes trade among member countries.

(*) Includes trade among member countries.

Soybeans

8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0

Import volume (soybeans)
Chicago soybeans (right scale)

200
150
100
50
0
02

(Reference) Share of China in world crude oil imports
2001
China
2.9%

(1t, $)

300

01

02

Composition of world steel imports by country
1990
2000
2002
45.2%
37.2%
35.7%
EU (*)
9.5%
12.5% 10.2%
U.S.
2.5%
6.3%
8.9%
China
2.9%
3.5%
3.6%
Korea
2.0%
3.4%
2.9%
Canada(10,000t)

250

400
01

04
(monthly basis)03

Notes :

1. Scrap iron is represented by U.S. No.1 heavy (CF)for Korea.
2. Polystyrene resin is represented by general-purpose
GP (CIF) for East Asia.
3. Soybeans are represented by Chicago soybean market
price, short term.
Sources : National Bureau of Statistics of China, “China Monthly
Economic Indicators;” Nikkei Research Institute ofIndustry and Markets, “Nikkei Commodity
Information;” WTO, “International Trade Statistics
2003;” IEA, “Key World Energy Statistics 2003.”

04(monthly basis)

Composition of world soybean imports by country
1990
2000
2002
47.1% 40.5% 40.6%
EU (*)
9.0%
11.7% 11.4%
U.S.
11.4% 10.5%
8.8%
China
1.8%
3.3%
3.5%
Korea
2.0%
2.6%
2.6%
Canada(*) Includes trade among member countries.

 39 

Strong Yen Suppressing Import Prices
Figure 3-7. Trend of Price IndicesFigure 3-8. Trend of U.S. Price Indices(2000=100)(2000=100)

130

120

125

115

120
110

115

105

110

100

105
100

95

95
90

90

85

85

(CY quarterly basis)(CY quarterly basis)

80

80
96

97

98

99

00

01

02

03

96

04

97

98

99

00

01

Import price index (contract currency basis)

CPI

Import price index (yen basis)

PPI (final goods)

Corporate goods price index

PPI (intermediate goods)

02

03

04

PPI (raw materials)

Consumer price index (excluding fresh foods)

Import prices

Figure 3-9. Trend of Import Price Index (year-on-year change by component)(1) Contract currency basis(%)
15(2) Yen basis

(%)
15

(¥/$)
160

10

140

5

5

120

0

0

100

-5

-5

80

-10

-10

60

(CY quarterly basis)

-15
96

97

98

99

Metal/related products
Petroleum/coal/natural gas
Machinery/equipment
Food staffs/feed stuffs

00

01

02

03

(CY quarterly basis)

-15

04

Wood/related products
Chemicals/related products
OthersAggregate average

Notes :

96

97

98

99

00

Metal/related products
Petroleum/coal/natural gas
Machinery/equipment
Food stuffs/feed stuffs
Exchange rate (right scale)

01

02

03

Wood/related products
Chemicals/related products
OthersAggregate average

1. CPI and PPI for U.S. are core indices excluding food and energy.
2. Exchange rate represents quarterly average.
Sources : Bank of Japan, “Price Indexes Monthly,” and “Financial and Economic Statistics Monthly;” U.S. Department ofLabor, “Producer Price Index” and “Consumer Price Index.”

 40 

04

40

Yen appreciation

10

Slowed Decline in Corporate Goods Price, Consumer Prices in Mild Deflation
Figure 3-10. Trend of Corporate Goods Price (domestic demand goods)(1) By type of goods(change on previous year, %)(2) By industry(change on previous year, %)
20

5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0

(change on previous year, %)2.0
15 1.51.0
10 0.5
50.0
0 -0.5-1.0-5 -1.5-10 -2.0-15 -2.5
-3.0
-20

96

97

98

99

00

01

01

02
03
04
(CY quarterly basis)

Minerals
Food
Iron/steel
Pulp/paper
Other materials industries
Other machinery/equipment
Corporate goods priceNotes :

Corporate prices represent average of domestic and import pricesof domestic demand goods.
Sources : Bank of Japan, “Price Indexes Monthly;” IMF, “International
Financial Statistics.”

Figure 3-11. Trend of Consumer Prices(excluding fresh foods)(change on previous year, %)

2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5

2.0
1.0
0.0

(change on previous year, %)

-1.0

96
98

99

00

01

Industrial products
Agricultural & livestock products
General services, etc.
Public services, etc.
Consumer prices (excluding fresh foods)

02

03

04

97

98

99

00

01

02

03

04

(CY quarterly basis)
Advertising
Communication/broadcasting
Information services
Finance/insurance
Miscellaneous services
Leasing/rental
Real estate services
Transportation (domestic factor)
Transportation (overseas factor)
All items (excluding overseas factor)(CY quarterly basis)

Note :

General services, etc. include publications. Public
services, etc. include electricity, gas and water changes.
Source : Ministry of Public Management, Home Affairs, Posts
and Telecommunications, “Monthly Report on
Consumer Price Index.”

Scraps & waste
EnergyNon-ferrous metals
ChemicalsElectric machinery & equipment
OthersFigure 3-12. Trend of Corporate Service
Prices

3.0

97

04

1. Other machinery/equipment include general machinery equipment,
precision instruments and transportation equipment.
2. Other materials industries include ceramics/stone/clay and textiles.
3. Energy includes electric power, gas/water and petroleum/coal products.
4. Food includes agriculture, forestry/fishery products and processed food stuffs
Bank of Japan, “Price Indexes Monthly.”

Source :96

03(CY quarterly basis)

Final goods
Intermediate goods
Raw materials
Corporate goods price (domestic demand goods)
International commodities (excluding crude oil) (right scale)Note :

02

Note :

Transport (overseas factor) includes maritime transport,international air freight transport and international air passenger
transport.
Source : Bank of Japan, “Price Indexes Monthly.” 41 

Upward Trends in Input/Output Prices Uneven in Materials Sub-sector

Figure 3-13. Trend of Input Prices(materials industries)

Figure 3-14. Trend of Output Prices(materials industries)(change on previous year, %)(change on previous year, %)
8.0

3.0

6.0

2.0

4.0

1.0

2.0
0.0
0.0
-1.0
-2.0
-2.0

-4.0

-3.0

-6.0
(CY quarterly basis)

-8.0
96

97

98

99

00

TextilesNon-ferrous metals
Ceramics, stone/clay

01

02

03

(CY quarterly basis)

-4.0

04

96

97

98

99

00

01

02

03

04

Pulp/paper/wooden products

TextilesPulp/paper/wooden products

Chemicals

Non-ferrous metals

Chemicals

Iron/steel

Ceramics, stone/clay

Iron/steel

Materials industries

Materials industries

Note :

Note :

Materials industries: textiles, pulp/paper/wooden
products, chemicals, ceramics/stone/clay, iron/steel andnon-ferrous metals.
Source : Bank of Japan, “Price Indexes Monthly.”

Materials industries: textiles, pulp/paper/wooden products
chemicals, ceramics/stone/clay, iron/steel and non-ferrous
metals.
Source : Bank of Japan, “Price Indexes Monthly.”

Figure 3-15. Trend of Price Shifting Rate (materials industries)
BottomIndustry
Paper/pulp

Chemicals

Notes :

Source :

I
II
III
I
II
III

Peak

2Q/1996 Ј 2Q/1997
4Q/1999 Ј 1Q/2001
4Q/2001 Ј 1Q/2004
1Q/1996 Ј 2Q/1997
1Q/1999 Ј 2Q/2001
1Q/2002 Ј 1Q/2004

Price shiftingrate
60.7 㧑
56.0 㧑
80.3 㧑
34.0 㧑
29.7 㧑
27.2 㧑

BottomIndustry
Iron/steel

Non-ferrous

I
II
III
I
II
III

Peak

3Q/1996 Ј 3Q/1997
4Q/1999 Ј 3Q/2000
4Q/2001 Ј 1Q/2004
3Q/1996 Ј 3Q/1997
1Q/1999 Ј 1Q/2001
4Q/2001 Ј 1Q/2004

Price shiftingrate
57.7 㧑
38.8 㧑
72.7 㧑
52.9 㧑
36.7 㧑
42.7 㧑

1. Price shifting rate is calculated as follows:
price shifting rate = growth rate of output price index from bottom to peak (%)/growth rate of input price index from bottom topeak (%)×100.
2. Bottom and peak for price shifting rate are that of input prices.
Bank of Japan, “Price Indexes Monthly.” 42 

Shifting Price in Under-capacity Industries
Figure 3-16. Trend of Overcapacity/Under-capacity Index (materials industries)(“overcapacity” – “under-capacity”, %)
20
15
10
5
0
-5

-15
90

91

92

93

94

Paper/pulp⚕䊶䊌䊦䊒
Non-ferrous metals
㕖㋕㊄ዻ

Textiles❫⛽Iron/steel㋕㍑

Materials industries⚛᧚ဳChemicals
ൻቇ

-10

95

96

97

98

99

00

01

02

03

(CY quarterly basis)

Figure 3-17. Relationship between Overcapacity/Under-capacity Index andPrice Shifting Rate

Overcapacity(“overcapacity” – “under-capacity”, %)
10
㸈
8

6

㸉

㸉

4
2

Chemicals㸈

Under-capacity0

Non-ferrous
metals㸇
Iron/steel

㸇
㸈

-2

㸇

-4

㸉

㸈

㸇

㸉

-6

Paper/pulp

-8
0

10

20

30

40

50
60
Price shifting rate

70

80

90

100
(%)

Notes :

1. Periods I, II and III for individual industries are same as in Figure 3-15.
2. Overcapacity/under-capacity index in Figure 3-17 represent peak value for each period.
Sources : Bank of Japan, “Price Indexes Monthly” and “Short-term Economic Survey of Enterprises in Japan (Tankan );” Ministry of
Economy, Trade and Industry, “Economy, Trade and Industry Statistics.”

Figure 3-18. Pattern of Determination of Output Prices and Volume in Midstream Industries(1) Iron/steel and paper/pulp
䌄(2) Chemicals and non-ferrous metals

䌓㩾㩾

䌄㩾

䌄㩾

䌓㩾

䌓㩾

䌄

䌓

䌓

Rise in raw
ේ᧚ᢱଔᩰ਄᣹
material prices
Increasein demand㔛ⷐ᜛ᄢ

Increasein demand ේ᧚ᢱଔᩰ਄᣹
Rise in raw material prices㔛ⷐ᜛ᄢCapacity
consolidation
⸳஻㓸⚂ൻ

Pressure for supplyଏ⛎Ⴧ࿶ജ
increase䌐㩾㩾

Excessive demand(=under-capacity)

䌐㩾
䌐

䌓㩾㩾

䌐㩾
䌐㩾㩾
䌐

䌑 䌑㩾

Excessive supply(=overcapacity)䌑 43 

䌑㩾

Downtrends of Input/Output Prices in Processing & Assembly Sub-sector
Figure 3-19. Trend of Input Prices (processing &assembly industries)

Figure 3-20. Trend of Output Prices (processing &assembly industries)(change on previous year, %)(change on previous year, %)
2.0

2.0

1.5
1.0

1.0
0.5

0.0

0.0
-0.5

-1.0

-1.0
-1.5

-2.0

-2.0
-2.5

-3.0

-3.0

(CY quarterly basis)-4.0(CY quarterly basis)

-3.5
96

97

98

99

00

01

02

Precision instruments
Electrical machinery
Processing & assembly industries

03

04

96

97

98

Food/beverages
Transportation equipment

Figure 3-21. Year-on-Year Change in Current
Profits by Component (materials)

99

00

01

02

03

04

General machinery
Other manufacturing

Figure 3-22. Year-on-Year Change in Current
Profits by Component (processing & assembly)

(%)
150

(%)

250
200

100

150
50

100
50

0

0

-50

-50
-100

-100
(CY quarterly basis)(CY quarterly basis)
-150

-150
96

97

98

99

00

01

02

96

03

Terms of trade
Sales volume
Confounding term

97

98

99

00

01

02

Sales prices
Fixed costYear-on-year change in current profits

Note :

Materials: textiles, pulp/paper/wood products, chemicals, ceramics/stone/clay, iron/steel and non-ferrous metals.
Processing & assembly: food/beverages, general machinery, electric machinery, precision machinery and transport equipment.
Sources : Bank of Japan, “Price Indexes Monthly;” Ministry of Finance, “Quarterly Report of Statistical Survey of Incorporated Enterprises.” 44 

03

Impact of Worsening Terms of Trade on Corporate Profits (Estimate)
Figure 3-23. Impact of 1% Rise in Input Prices on Corporate Profits inMaterials Industries (estimate)Materials industries(%)

Processing & assembly industries

15
10
5

Output price effect
(A)
11.5%

Output price effect (A)
0%

0
-5
-10

Input priceeffect (B)-18.6%

Input price effect (B)-5.1%

Net effect(A) – (B)
-7.1%

-15

Net effect(A) – (B)
-5.1%

-20

Notes : 1. Definition of input price effect and output price effect in materials and processing & assembly sub-sectors is as follows:· Output price effect in materials (A) = (change in materials output prices in case of 1% change in materials input
prices (0.468%: price shifting rate in materials for current period))×(change in current profits in materials in case of
1% change in materials output prices (24.5%)).
· Input price effect in materials (B) = change in current profits in materials in case of 1% change in materials input
prices (-18.6%).
· Output price effect in processing & assembly = 0.
· Input price effect in processing & assembly = (change in processing & assembly input prices in case of 1% change inmaterials input prices (0.37% (change in processing & assembly input prices in case of 1% change in materials
output prices)×0.468 (price shifting rate in materials for current period))×(change in current profits in processing &assembly in case of 1% change in processing & assembly input prices (-29.6%)).
2. Estimate result is as follows:(2) Price function(1) Corporate profit function-16.3
㧔-6.7㧕
24.5
㧔13.6㧕
25.2
㧔25.6㧕
-18.6
㧔-12.9㧕
-18.4
㧔-21.3㧕
-5.6
㧔-19.3㧕

Processing &assembly-21.8
㧔-5.5㧕
37.4
㧔16.4㧕
35.4
㧔25.8㧕
-29.6
㧔-14.3㧕
-27.7
㧔-23.0㧕
-6.8
㧔-23.2㧕

0.96

0.98

2.20

2.27

Materials
Constant term
Output price effect (Į)
Output volume effect (ȕ)
Input price effect (Ȗ)
Input volume effect (İ)
Fixed cost effect (į)
R2 adjusted for degrees of
freedom
D.W.

Constant term
Output price index in materials (ȗ)
R2 adjusted for degrees of freedom
D.W.

-71.6
㧔-0.0㧕
0.37
㧔4.1㧕
0.99
1.82

(3) Estimation formula
Corporate profit function:ln (current profits) = constant term + Įln (output price index) + ȕln (output volume) +Ȗln (input price index) + İln (input volume) + įln (fixed cost)
Price function:ln (input price index in processing & assembly) = constant term + ȗln (output priceindex in materials)(4) Estimate covers the period from Q2/1990 to Q4/2003.
(5) Figures in parentheses ( ) are t values.
Sources : Bank of Japan, “Price Indexes Monthly;” Ministry of Finance, “Quarterly Report of Statistical Survey of Incorporated
Enterprises.” 45 

Appendix

Chinese Economy: Analysis of Factors behind Overheated Investment in
Fixed Assets
1. Overrunning Real GDP Growth and Rising Fixed Asset Investment
Real GDP (actual figure) in January-March 2004 grew 9.8% on the previous year, far exceeding theannual target of 7% decided at the National People’s Congress meeting in March. Concerned about
economic overheating, the Chinese government has implemented a tight money policy since the middle of last year. However, the recent announcement of an “overrun” on the established target raises
questions about the effectiveness of the government’s policy, and there is greater vigilance on theeconomic situation.

Figure 1. Aggregate Social Fixed Asset Investment(%)(trillion yuan)

50

6
43.0

5

40

4
30

26.7

3

20
2
10

1
0

0
99 00 01 02 03㸇02㸈 㸉 㸊 㸇03

㸈 㸉 㸊 㸇04

Aggregate social fixed asset investment
Change on previous year

Sources: Statistical Yearbook of China; National Bureau of Statisticsof China website.

One cause of the overrun is excessive investment in fixed assets. Indeed, aggregate social fixed asset
investment rose a massive 43.0% on the previous year in the current period (Figure 1). On an annual
basis, the growth of aggregate social fixed asset investment accelerated to 26.7% in 2003, while on aquarterly basis too it has been recording substantial increases that exceed real GDP growth. The current growth of 43.0%, however, represents a significant acceleration.

 47 

Figure 2. Aggregate Social Fixed Asset Investment as % of Nominal GDP
(%)
70
60
47.2

50
40

36.4

30

32.4

20

25.7

22.4
10
99 00 01 02 03

㸇 㸈 㸉 㸊 㸇 㸈 㸉 㸊 㸇
02
03
04

Sources: Statistical Yearbook of China; China Monthly Economic
Indicators; National Bureau of Statistics of China website.

Aggregate social fixed asset investment is also rising as a percentage of GDP (nominal figure1). Although it appears that the ratio declined in the current period on a quarterly basis, aggregate social
fixed asset investment in China was restrained in the first quarter, and then increased significantly
from the second to fourth quarter.2 The ratio for the current period (32.4%) is 10 points higher than in
the first quarter of 2002, indicating the growing important of fixed asset investment in the Chinese
economy (Figure 2).

Figure 3. GDP Growth and Contribution of Aggregate Social Fixed Asset Investment
(%)
15
10

Contribution of factors other than
fixed asset investment
Contribution of fixed asset
investment
Real GDP growth

5
0
-5
㸇
03

㸈

㸉

㸊

㸇
04

Sources: China Monthly Economic Indicators; National Bureau of Statistics of China
website.

1

National Bureau of Statistics of China does not publish data on real GDP.
This restraint in the first quarter may be attributed to several factors. For example, investment tends to be restrained until
March, when the National People’s Congress sets economic policies and targets for the year. Also, the first quarter includes
the Chinese New Year period, when economic activity slows down. The peak in the fourth quarter may be explained by thefact that most of the investment data are submitted by business units in that quarter.
2

 48 

Looking at the contribution of fixed asset investment to nominal GDP growth, nominal GDP grew
13.1% in the current period, of which 11.0% (a contribution of 84.0%) came from fixed asset investment (Figure 3). Thus, the growth of GDP in the current period was substantially influenced by theincrease in fixed asset investment.

2. Factors by Industry: Significant Growth in Iron/Steel and Chemicals,
Property Investment Still Booming
Since January-February 2004, the National Bureau of Statistics of China has been publishing thecomposition of aggregate social fixed asset investment by industry and region, as well as its
year-on-year growth by component. The data only cover investment in urban areas.
Aggregate social fixed asset investment in the current period (January-March 2004) totaled 879.9
billion yuan (up 43.0% on the previous year), of which urban areas accounted for 705.9 billion yuan
(up 47.8% on the previous year) and rural areas accounted for 174.0 billion yuan (up 26.4% on theprevious year). This indicates that investment is more active in urban areas than in rural areas.
On a skyline chart,3 the composition of urban fixed asset investment in the current period by industry4 (Figure 4) reveals the following:1) The non-manufacturing sector has a larger share and contribution than the manufacturing sector.
2) The real estate, metal (iron/steel) and energy-related industries make the largest contribution
to the increase in investment.
3) In the manufacturing sector, industries such as metals, textiles and chemicals have recorded
above-average increases.

Table 1. Industries with Largest Contribution to Investment Growth

Manufacturing(1) Metals(2) Chemicals(3) Machinery
Non-manufacturing(1) Real estate(2) Power/gas/water(3) Hydrology/environment
Source:Change on previous year
75.8%
108.4%
73.3%
70.3%
39.5%
39.8%
53.1%
54.7%

Share
27.2%
8.7%
6.0%
3.5%
72.8%
29.2%
9.2%
8.2%

Contribution
36.3%
14.1%
7.9%
4.5%
63.7%
25.7%
9.8%
9.0%

National Bureau of Statistics of China website.

The government’s stance of restricting property investment has become clear since the People’s Bankof China issued a circular to strengthen control over lending for real estate. Nonetheless, property investment is still strongly inflating total fixed asset investment, indicating that the government’s policy
has not necessarily been effective. As press reports clearly show, total investment has been led by excessive spending in industries such as metals (iron/steel in particular) and chemicals.

3

See DBJ’s semiannual Survey on Planned Capital Spending.
See below (Note) for industrial classification. The original data, collected through central and local authorities for eachindustry, are more often compiled on a principal business basis than on an investment specific basis. For example, investmentin the construction of a property building by a national steel manufacturer will be considered as investment in the iron/steel
industry, rather than as property investment.

4

 49 

Figure 4. Fixed Asset Investment by Industry(January-March 2004)

Figures indicate

Decreaseᷫዋ

IncreaseჇട   

Food/
㘩ຠ
beveragesShare (%)

Manufacturing

⵾ ᭴
ㅧ ᚑ
Ყ
ᬺ 㧑

Share (January-March 2003)ኻ೨ᐕᐲ on previous year (%)
           Ⴧᷫ₸
Change❫⛽Textiles



ൻቇ
Chemicals

Metals
㊄ዻ








Change on previous year (January-March 2004)

ᯏ᪾
MachineryElectric ma㔚᳇ᯏ᪾
chinery




ㄘᨋ’Ṫᬺ


AgriculPower/gas/water ture/forestry/live 㔚ജ㨯ࠟࠬ㨯᳓㆏
stock/fisheries





Non-manufacturingណជᬺExtraction



Transport
੤ㅢㆇャ



Information/ᖱႎ㨯࠰ࡈ࠻
software




㕖
⵾
ㅧ
ᬺ

ߘߩઁ⵾ㅧᬺ
Other
manufacturing



෈ᄁ࡮ዊᄁ
Wholesale/retail




ਇേ↥
Real
estate












Services
ࠨ࡯ࡆࠬ


Hydrology/
᳓೑࡮ⅣႺ੐ᬺ
environmentEducation/
culture/welfare
ᢥᢎ࡮⑔␩




             Allో↥ᬺᐔဋ
industries average
Source: National Bureau of Statistics of China website.

 50 

Figure 5. Fixed Asset Investment by Region(January-March 2004)

Decreaseᷫዋ

Figures indicate

Change on previous year (January-March 2004)
Share (January-March 2003)

IncreaseჇട               ኻ೨ᐕᐲ

Change on previous year (%)
Beijingർ੩Ⴧᷫ₸ 
Tianjin
ᄤᵤ




Share (%)

᭴
ᚑ
Ყ
㧑



Hebei
ᴡർ



ㆯካ
LiaoningShanghai
਄ᶏ




Jiangsu
ᳯ⯃




East

᧲
ㇱ

Zhejiang
ᵽᳯ


Fujian
⑔ᑪ





Shandong
ጊ᧲







Shanxiጊ⷏

Guandong
ᐢ᧲



Hainan
ᶏධ


Jilin
ศᨋ



቟ᔂ
Anhui



Heilongjiang
㤥㦖ᳯ




Central/west

ਛ
࡮
⷏
ㇱ



ᳯ⷏
Jiangxi



ᴡධ
Henan



ḓർ
Hubei


ᐢ⷏
Guangxi





Gansu
↞☽



Guizhou
⾆Ꮊ


⷏⬿
XizangChongqing
㊀ᘮ


྾Ꮉ
Sichuan



ḓධ
Hunan


ౝ⫥ฎ
Neimenggu



㔕ධ
Yunnan㒩⷏Shanxi㕍ᶏ
Qinhai




              ⺋ᏅMarginof errorً

Xinjiangᣂ⇴ ో࿖ᐔဋ
National average

Source: National Bureau of Statistics of China website.

 51 

ካᄐ
Ningxia

3. Factors by Region: Active Investment in Inland as well as Coastal Areas
Looking at factors behind the increase in investment by region (province), the following characteristics are observed (Figure 5):1) The contribution from the eastern region, i.e. coastal area, is substantial.
2) Provinces with the largest contribution include Jiangsu, Shandong and Zhejiang, all located in
the coastal area.
3) The momentum of investment has spread into the central and western regions (inland area),
which still account for a small share of total investment.

Table 2. Provinces with Largest Contribution to Investment Growth(1) Jiangsu(2) Shandong(3) Zhejiang

Change on previous year ShareContribution
66.2%
12.8%
17.7%
62.2%
7.0%
9.1%
47.3%
9.0%
8.9%

Source: National Bureau of Statistics of China website.

It is clear from Figure 5 that the major contribution comes from the more industrialized coastal area. It
is also clear, however, that investment is now expanding into the inland area. Investment in the inlandarea shows a relatively even distribution, with growth in each province being near the average. The
fairly even growth of fixed asset investment in individual provinces, coupled with the strong rise ininvestment in specific industries including metals, as shown in Figure 4, points to the “blind duplication of investment in every region,” pointed out by the State Council.5

4. Difficult Control on Fixed Asset Investment: Marginal Effect of Credit Control andIncrease in Projects Led by Local Governments
The money stock continues to grow, although it has been slowing since the People’s Bank of Chinaraised the deposit reserve requirement ratio in September 2003 (Figure 6). The People’s Bank of Chinaraised the ratio again in April, but the experience of last year suggests that its effect will be short-lived.
Other options may include more in-depth tight money policies such as raising the statutory basic interest rate. However, the Chinese authorities are faced with the dilemma that any such rate increase
would widen the interest rate gap with the U.S. dollar, thus aggravating the current excessive liquidity.
There is little room to curb fixed asset investment through credit controls.

5“The highest priority is given to the control of blind investment and duplicated low value-added construction in certain
regions and industries,” said Zeng Peiyang, Vice-Premier of the State Council, on April 4, 2004.

 52 

Figure 6. Growth of Money Stock and Outstanding Bank Loans(Change on previous year, %)25

20

December 21
Interest rate reduced on
excess reserves.
January 1
Cap on lending rate
raised.

September 21
Deposit reserve
requirement
raised.

15

June 13
Control tightened on loans forreal estate.

10
1
02

3

5

7

9

11

1
03

3

5

7

9

11

1
04

3

Growth rate of M 2
Growth rate of loans by all financial institutions

Source: China Monthly Economic Indicators.

A classification of fixed asset investment6 into central and local projects indicates that the share of local projects, led by local governments, has been increasing constantly (Figure 7). “Top local government officials tend to neglect market principles and make excessive investment, as their performanceis measured by GDP data,” notes Li Yiping, Professor of Economics at Renmin University of China.

Figure 7. Share of Local Projects in Total Fixed Asset Investment(Million yuan)

(%)

90

5
4

85

3
80
2
75

1
0

70
99

00
01
02
03
Local projects
Central projects
Share of local projects (right scale)

Source: China Monthly Economic Indicators.

6

Excludes investment by urban and rural community enterprises and by proprietorships (China Monthly Economic Indicators).

 53 

“Under the influence of local governments, banks are obliged to finance local projects without sufficient review and monitoring.”7 The increase in local government-led projects ruins the effect of tightmoney policies introduced by the central government and undermines its control on investment behavior. Thus, it will take longer to slow down the overheated investment in fixed assets.

7

Li Yiping, “Local Governments Do Not Believe in Market Principles,” China Economic Times, May 10, 2004.

 54 

(Note)
The industrial classification by the National Bureau of Statistics was modified as follows in preparing
this report and the skyline charts.
(National Bureau of Statistics classification)
Major industries
National total
1. Agriculture, forestry, livestock & fisheries
Of which: forestry
2. Extraction
Coal mining
Oil & natural gas extraction
Black metal extraction
Non-ferrous metal extraction
Nonmetallic mineral extraction
Other extraction
3. Manufacturing
Food processing
Food production
Beverages
Tobacco processing
Spinning and weaving
ApparelLeather
Woodworking
Furniture
Paper
Printing
Sporting gear
Oil processing
Chemicals
Pharmaceuticals
Synthetics
RubberPlastic
Nonmetallic mineral
Black metal processing
Non-ferrous metal processing
Metal products
General machinery
Leased facilities
Transport equipment
Electric equipment
Electronic communication equipment
Measuring instruments
Craftwork
Recycled resource processing
4. Power, gas & waterElectric powerGas production & supply
Water production & supply
5. Construction
6. Transport, warehousing & post
Railroad transport
Road Transport
Urban public transportation
River & marine transport
Air transport
7. Information & software
8. Wholesale & retail
9. Hotels & restaurants
10. Finance
11. Real estate
12. Rental & commercial services
13. Scientific research & technical services
14. Hydrology, environment & public management
Hydraulic management
Environmental management
Public facility management
15. Community services
16. Education
17. Sanitation & social security
Of which: sanitation
18. Culture, sports & entertainment
19. Public management & social organization
20. International organizations(Classification in this report)
Total
Agriculture/forestry/livestock/fisheries
Extraction

Food/beverages

TextilesoOther manufacturing

Chemicals

Metals

Machinery

Electric machinery

Other manufacturing
Power/gas/wateroReal estateTransport

Information/software
Wholesale/retailoServices
oServices
Real estateoServices
oServices
Hydrology/environment

oServices
Education/culture/welfare

oServices 55 

List of Back Numbers (Including JDB Research Report)
No. 46 Recent Trends in the Japanese Economy: Impact of Rising International Commodity Prices on Corporate Input/Output Behavior (this issue)
No. 45 How Life Cycle Assessment (LCA) Can Enhance the Fight against Global Warming, August 2004
No. 44 Recent Trends in the Japanese Economy: A Medium-term Scenario for the Japanese Economy with
Special Focus on the Flow of Funds and Finance, March 2004
No. 43 Survey on Planned Capital Spending for Fiscal Years 2002, 2003 and 2004 (Conducted in August 2003),
November 2003
No. 42 Promoting Corporate Measures to Combat Global Warming: An Analysis of Innovative Activities in the
Field, September 2003
No. 41 Prospects and Challenges for End-of-Life Vehicle Recycling, May 2003
No. 40 Survey on Planned Capital Spending for Fiscal Years 2002 and 2003 (Conducted in February 2003),
May 2003
No. 39 China’s Economic Development and the Role of Foreign-Funded Enterprises, May 2003
No. 38 Decline in Productivity in Japan and Disparities Between Firms in the 1990s: An Empirical Approach
Based on Data Envelopment Analysis, March 2003
No. 37 Trends in Socially Responsible Investment: Corporate Social Responsibility in a New Phase, March
2003
No. 36 Recent Trends in the Japanese Economy: A Medium-term Scenario for the Sustainability of the Japanese Economy, February 2003
No. 35 Concerns for the Future and Generational Consumption Behavior, February 2003
No. 34 Prospects and Challenges Surrounding Japan’s Electrical Equipment Industry: General Electrical
Equipment Manufacturers’ Restructuring of Operations and Future Prospects, November 2002
No. 33 Survey on Planned Capital Spending for Fiscal Years 2001, 2002 and 2003, November 2002
No. 32 Behavior Trends of Japanese Banks toward the Corporate Sector and Their Impact on the Economy,
October 2002
No. 31 Microstructure of Investment and Employment Dynamics: Stylized Facts of Factor Adjustment Basedon Listed Company Data, October 2002
No. 30 Recent Trends in the Japanese Economy: Globalization and the Japanese Economy, August 2002
No. 29 Corporate Financing Trends in Recent Years: Fund Shortages and Repayment Burden, August 2002
No. 28 Urban Renewal and Resource Recycling: For the Creation of a Resource Recycling Society, July 2002
No. 27 Labor’s Share and the Adjustment of Wages and Employment, June 2002
No. 26 Survey on Planned Capital Spending for Fiscal Years 2001 and 2002, May 2002
No. 25 Environmental Information Policy and Utilization of Information Technology: Toward a Shift in Environmental Policy Paradigm, March 2002
No. 24 The Changing Structure of Trade in Japan and Its Impact: With the Focus on Trade in Information
Technology (IT) Goods, March 2002
No. 23 Microstructure of persistent ROA decline in the Japanese corporate sector: Inter-company disparities
and investment strategies, March 2002
No. 22 Recent Trends in the Japanese Economy: The Japanese Economy under Deflation and Prospects ofEvolution, February 2002

No. 21 Survey on Planned Capital Spending for Fiscal Years 2000, 2001 and 2002, December 2001
No. 20 Current Situation and Challenges for Cable Television in the Broadband Era, October 2001
No. 19 Recent Trends in the Japanese Economy: The Japanese Economy under Deflation, August 2001
No. 18 Introduction of a Home Appliance Recycling System: Effects & Prospects: Progress towards Utilisationof Recycling Infrastructure, June 2001
No. 17 Survey on Planned Capital Spending for Fiscal Years 2000 and 2001, June 2001
No. 16 Revitalization of Middle-aged and Elderly Workers in Japan’s Labor Markets: Requiring the Expansionof the Vocational Training Functions, March 2001
No. 15 Risk-Averting Portfolio Trends of Japanese Households, March 2001
No. 14 Consumption Demand Trends and the Structure of Supply: Focus on Retail Industry Supply Behavior,
March 2001
No. 13 Recent Trends in the Japanese Economy: Weakness of Current Economic Recovery and Its Background,
March 2001
No. 12 Empirical Reassessment of Japanese Corporate Investment Behavior: Features and Changes since the1980s, based on Micro-level Panel Data, March 2001
No. 11 Survey on Planned Capital Spending for Fiscal Years 1999, 2000 and 2001, October 2000
No. 10 Job Creation and Job Destruction in Japan, 1978-1998: An Empirical Analysis Based on EnterpriseData, September 2000
No. 9

Recent Trends in the Japanese Economy: Information Technology and the Economy, September 2000

No. 8

Trend of International Reorganization Affecting the Japanese Automobile and Auto Parts Industries,
June 2000

No. 7

Survey on Planned Capital Spending for Fiscal Years 1999 and 2000, June 2000

No. 6

Current Status and Future Perspective of the Japanese Remediation Industry: Technology and Market
for Underground Remediation, May 2000

No. 5

Recent Trends in the Japanese Economy: The 1990s in Retrospect, March 2000

No. 4

Destabilized Consumption and the Post-bubble Consumer Environment, February 2000

No. 3

The Slump in Plant and Equipment Investment in the 1990s: Focusing on Lowered Expectations, theDebt Burden and Other Structural Factors, January 2000

No. 2

Survey on Planned Capital Spending for Fiscal Years 1998, 1999 and 2000, November 1999

No. 1

Corporate Strategies in Japan’s Semiconductor Industry: Implications of Development in Other AsianCountries, November 1999_________________________________________________________________________________________JDB Research Report

No. 96 Recent Trends in the Japanese Economy: Focused on Fixed Investment and Capital Stock, August 1999
No. 95 Efforts to Protect the Natural Environment in the United States and Germany: Environmental Mitigation and Biotope Conservation, July 1999
No. 94 Survey on Planned Capital Spending for Fiscal Years 1998 and 1999, June 1999
No. 93 Towards the realization of ‘environmental partnership’: A survey of Japan’s environmental NPO sector
through comparison with Germany, June 1999
No. 92 The Impact of Demographic Changes on Consumption and Savings, March 1999

No. 91 Recent Research and Development Trends in Japanese Enterprises: Technology Fusion, March 1999
No. 90 Recent Trends in the Japanese Economy: Prolonged Balance Sheet Adjustment, January 1999
No. 89 Impact of Asset Price Fluctuations on Household and Corporate Behavior: A Comparison between Japan and the U.S., December 1998
No. 88 Survey on Planned Capital Spending for Fiscal Years 1997, 1998, and 1999, December 1998
No. 87 Foreign Exchange Rate Fluctuations and Changes in the Input-Output Structure, November 1998
No. 86 Structural Changes in Unemployment of Japan: An Approach from Labor Flow, November 1998
No. 85 Recent Trends in the Japanese Economy: Characteristics of the Current Recession, August 1998
No. 84 R&D Stock and Trade Structure in Japan, August 1998
No. 83 Survey on Planned Capital Spending for Fiscal Years 1997 and 1998, August 1998
No. 82 The Significance, Potential, and Problems of DNA Analysis Research: Establishing Public Acceptanceis Essential, May 1998
No. 81 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1996, 1997 and1998 Conducted in August 1997, March 1998
No. 80 Recent Trends in the Japanese Economy: Growth Base of the Japanese Economy, January 1998
No. 79 Information Appliances: The Strength of Japanese Companies and Tasks for the Future, January 1998
No. 78 Challenges and Outlook for the Japanese Machinery Industries: Impact of ISO14000 Series and Environmental Cost, January 1998
No. 77 Current Conditions and Issues of Computerization in the Health Care Industry: For the Construction of
a Health Care Information Network, January 1998
No. 76 Household Consumption and Saving in Japan, December 1997
No. 75 The Direction of Japanese Distribution System Reforms: Strengthening the Infrastructure to Support
Diverse Consumer Choices, November 1997
No. 74 Foreign Direct Investments by Japanese Manufacturing Industries and Their Effects on International
Trade, October 1997
No. 73 The Impact of the Changing Trade Structure on the Japanese Economy: With Special Focus on the Effects on Productivity and Employment, October 1997
No. 72 An Analysis of Foreign Direct Investment and Foreign Affiliates in Japan, August 1997
No. 71 Recent Trends in the Japanese Economy: Stock Replacement and New Demand as Aspects of Economic Recovery, August 1997
No. 70 Corporate Fundraising: An International Comparison, June 1997
No. 69 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1996 and 1997
Conducted in February 1997, May 1997
No. 68 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1996 and 1997
Conducted in August 1996, August 1997
No. 67 An International Comparison of Corporate Investment Behavior: Empirical Analysis Using Firm Data
from Japan, France and the US, April 1997
No. 66 Housing in the National Capital: Analysis of the Market for Housing using Micro Data, March 1997
No. 65 The Environment for Locating Business Operations in Major East Asian Cities, January 1997
No. 64 Direction of Reconstruction of Business Strategy in the Chemical Industry, January 1997

No. 63 Reflection on Discussions Concerning Regulation of the Electric Power Industry: Deregulation of theElectric Power Industry in Japan and Implication of Experiences in the United States, December 1996
No. 62 Current Status and Future Perspective of the Japanese Semiconductor Industry, November 1996
No. 61 A Breakthrough for the Japanese Software Industry?: Responsiveness to Users’ Needs is the key, October 1996
No. 60 Recent Trends in the Japanese Economy Focusing on the Characteristics and Sustainability of the Current Economic Recovery, September 1996
No. 59 Analysis of the Primary Causes and Economic Effects of Information: Related investment in the UnitedStates and Trends in Japan, August 1996
No. 58 Selected Summaries of Research Reports: Published in FY1995, June 1996
No. 57 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1995 and 1996
Conducted in February 1996, May 1996
No. 56 Recent Trends in the Japanese Economy, May 1996
No. 55 Issues Concerning the Competitiveness of the Japanese Steel Industry, February 1996
No. 54 Changes in the Financial Environment and the Real Economy, January 1996
No. 53 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1994, 1995 and1996 Conducted in August 1995, October 1995
No. 52 Current Economic Trends: Focusing on the Appreciation of the Yen and its Effects, October 1995
No. 51 Problems Concerning the International Competitiveness of the Petrochemical Industry, October 1995
No. 50 An Economic Approach to International Competitiveness, October 1995
No. 49 Selected Summaries of Research Reports Published in FY1994, July 1995
No. 48 Strategies for Improving the Efficiency of the Japanese Physical Distribution System: Part 2, July 1995
No. 47 Issues on International Competitive Strength of the Auto Industry, June 1995
No. 46 Problems Concerning the International Competitiveness of the Electronics and Electric Machinery Industry, June 1995
No. 45 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1994 and 1995
Conducted in March 1995, June 1995
No. 44 Strategies for Improving the Efficiency of the Japanese Physical Distribution System, March 1995
No. 43 Capital Spending Recovery Scenario Cycle and Structure, August 1994
No. 42 Progress of International Joint Development between Industrialized Countries on the Private Level,
May 1994
No. 41 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1993, 1994 and1995 Conducted in August 1994 , November 1994
No. 40 Selected Summaries of Research Reports Published in FY1993, June 1994
No. 39 Recent Trends in Japan’s Foreign Accounts, April 1994
No. 38 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1993 and 1994
Conducted in March 1994, April 1994
No. 37 Economic Zones and East Asia Prospect for Economic Activity Oriented Market Integration, December
1993
No. 36 Japanese Corporate Responses to Global Environmental Issues, December 1993

No. 35 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1992, 1993 and1994 Conducted in August 1993, September 1993
No. 34 Structure of Profit to Capital in the Manufacturing Industry, September 1993
No. 33 Comparison of the Japanese and The U.S. Labor Markets, October 1992
No. 32 The Relative Competitiveness of U.S., German, and Japanese Manufacturing, March 1993
No. 31 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1992 and 1993
Conducted in March 1993, April 1993
No. 30 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1991, 1992 and1993 Conducted in August 1992, December 1992
No. 29 Flow of Funds in the 80s and Future Corporate Finance in Japan, November 1992
No. 28 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1991 and 1992
Conducted in February 1992, April 1992
No. 27 An Analysis of Foreign Direct Investment in Japan, March 1992
No. 26 Projection of Japan's Trade Surplus in 1995: Analysis of Japan's Trade Structure in the 80s, February
1992
No. 25 Intra-Industry Trade and Dynamic Development of The World Economy, November 1991
No. 24 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1990, 1991 and1992 Conducted in August 1991, September 1991
No. 23 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1990 and 1991
Conducted in February 1991, March 1991
No. 22 Trends of the Petrochemical Industry and its Marketplace in East Asia, March 1991
No. 21 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1989, 1990 and1991 Conducted in August 1990, September 1990
No. 20 Deepening Economic Linkages in The Pacific Basin Region: Trade, Foreign Direct Investment andTechnology, September 1990
No. 19 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1989 and 1990
Conducted in February 1990, March 1990
No. 18 Petrochemicals in Japan, The US, and Korea an Assessment of Economic Efficiency, February 1990
No. 17 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1988, 1989 and1990 Conducted in August 1989, October 1989
No. 16 Impact of the EC Unification on Japan’s Automobile and Electronics Industries, August 1989
No. 15 Industrial and Trade Structures and the International Competitiveness of Asia’s Newly Industrializing
Economies, August 1989
No. 14 The Japan Development Bank Reports on Capital Investment Spending: Survey for Fiscal Years 1988
and 1989 Conducted in February 1989, March 1989
No. 13 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1987, 1988 and1989 Conducted in August 1988, September 1988
No. 12 Growing Foreign Investors’ Activities and the Future of Internationalization, September 1988
No. 11 Futures Tasks and Prospects for the Japanese Machine-Tool Industry, July 1988
No. 10 International Division of Labor in the Machine Industries Among Japan, Asia’s NICs and ASEANCountries, June 1988

No. 9Trends of the Petrochemical Industry and its Marketplace in East Asia around Japan, May 1988

No. 8

The International Competitiveness of Japan and U.S. in High Technology Industries, April 1988

No. 7

The Japan Development Bank Reports on Private Fixed Investment in Japan, March 1988

No. 6

Economic Projections of the Japan’s Economy to the Year 2000, February 1988

No. 5

The Japan Development Bank Reports on Private Fixed Investment in Japan, September 1987

No. 4

Current Trends in the Japanese Auto Parts Industry in Overseas Production, July 1987

No. 3

Current Moves for Foreign Direct Investment into Japan, May 1987

No. 2

Overseas Direct Investments by Japanese Corporations, May 1987

No. 1

Current U.S. Consumption Trends, May 1987