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QuestionWhat are the factors on which the Bank bases its assessment of economic activity? How does it assess developments in expenditure in each economic sector, namely, public investment, exports and imports, business fixed investment, private consumption, and housing investment?


The Background section of the Outlook for Economic Activity and Prices (Outlook Report) provides a detailed explanation of the Bank's assessments of economic activity and its outlook. Referring to the Outlook Report, the following describes the factors on which the Bank bases such assessments.

"I. Current Situation of Economic Activity and Its Outlook" in the Background section of the report assesses recent developments in final demand for goods and services and their outlook, based on, for example, various statistics and interviews with firms. Final demand refers to expenditure in each economic sector, such as public investment, exports and imports, business fixed investment, and consumption.

Overall Economic Activity

As in many other countries, Japan's economy consists of various sectors, namely, (1) the government sector (all levels of governments, including national and local), (2) the foreign sector (foreign individuals, firms, and governments), (3) the business sector (firms), and (4) the household sector (individuals). To measure overall economic activity, the expenditure approach of gross domestic product (GDP) is useful because it shows movements in final demand in each economic sector, such as public investment by the government sector, net exports by the foreign sector, business fixed investment by the business sector, and private consumption and housing investment by the household sector.

Other indicators that are useful in accurately assessing economic activity include the output gap, which shows the level of economic activity estimated from capital and labor utilization ratios, and the potential growth rate, which reflects the growth capacity of Japan's economy from a longer-term perspective. These two indicators are not objective data observed in the economy, but rather estimates based on certain assumptions. The Bank releases the Research Data series "Output Gap and Potential Growth Rate" on a quarterly basis to use when assessing economic developments, and also to provide data to the general public to help them in their analysis of economic activity and prices.

In this way, GDP and the output gap are useful in grasping developments in the economy as a whole, but in order to examine economic activity in a more detailed and timely manner, it is important to examine a wide range of data including source data of GDP. In what follows, explanations are provided on what data the Bank uses in assessing economic activity by taking a look at expenditure in each economic sector.

Public Investment

Public investment is the central or local governments' expenditure related to, for example, the construction, maintenance, and enhancement of roads and public facilities. The Bank assesses recent developments in public investment from statistics on the amount of public construction completed as well as other data. The Bank projects the outlook for public investment from, for example, public works contracts and orders received for public construction as well as from central and local government budgets, both of which show developments in orders.

Exports and Imports

Net exports -- that is, exports minus imports -- are final demand related to the foreign sector. Exports represent overseas demand for goods produced and services provided in Japan, and imports represent demand in Japan for goods produced and services provided overseas. An increase in exports stimulates production activity in Japan, whereas an increase in imports contains growth in production in Japan because part of domestic demand is met by overseas businesses. Therefore, examining net exports -- which are the difference between exports and imports -- is important in assessing the level of economic activity.

Exports and imports of goods in nominal terms are released in the Trade Statistics of Japan compiled by the Ministry of Finance. Nevertheless, to assess developments in exports and imports consistently with real GDP, it is useful to look at them in real terms after excluding the effects of price fluctuations. From this viewpoint, the Bank compiles data that exclude the effects of price fluctuations from the above-mentioned Trade Statistics of Japan and release them as the Research Data series "Developments in Real Exports and Real Imports" on a monthly basis. The Bank uses these data when assessing economic developments, and also offers them to a wide range of users for their own analysis of economic activity and prices. Real export data broken down by region and by goods are also released to enable a more multi-faceted analysis of developments in Japan's exports.

Exports and imports of services are released in the Balance of Payments. To specifically capture foreign visitors' spending in Japan (categorized as exports of services), it is also important to track developments in foreign visitor arrivals and spending per visitor in Japan.

The Bank assesses the outlook for exports and imports of goods and services based on such factors as developments in demand in overseas markets and growth in overseas economies, foreign exchange rates (for example, the Effective Exchange Rate), and surveys regarding the production behavior of firms over the medium to long term.

Business Fixed Investment

Business fixed investment is final demand related to the business sector. This includes establishing new factories, purchasing machinery facilities, and setting up new supermarkets and department stores. Business fixed investment accounts for a large share of total GDP (about 20 percent) and is a driving force of the economy because it underpins the supply potential of goods and services. By increasing or decreasing fixed investment, firms adjust their supply capacity to an appropriate level that meets demand. Thus, business fixed investment in general is volatile and has a large influence on economic fluctuations.

In analyzing business fixed investment, it is important to assess developments in shipments of goods and machinery orders -- a leading indicator of business fixed investment. It is also important to carefully examine the factors that substantially affect firms' investment behavior, such as the capacity utilization rate, corporate profits, financial market conditions (including lending rates), business sentiment, and firms' perceptions of production capacity. Interviews with firms also support such analysis and play an important role in grasping new developments in business fixed investment.

Private Consumption

Private consumption -- which is spending by households on goods and services -- has the largest share of final demand, and accounts for more than half of GDP. Increases and decreases in household consumption -- that is, purchases of nondurable and semi-durable consumer goods, such as food and apparel; durable consumer goods such as automobiles; and services such as travelling and going to movies -- greatly affect economic activity.

In analyzing private consumption, it is important to examine developments in the sales of goods and services based on a wide range of statistics. The Bank releases the Research Data series "Consumption Activity Index" on a monthly basis, which comprehensively shows consumption activity in Japan, based on various sales and supply-side statistics on goods and services. To assess the underlying trend in private consumption, it is also useful to (1) obtain a grasp of the most up-to-date developments from interviews with firms as well as from alternative data -- the so-called high-frequency data -- which are more readily available than traditional statistical data, as they are updated more frequently, and (2) closely examine developments in the sentiment of consumers and firms relating to retail sales from a variety of survey results. The Bank assesses the outlook for private consumption based on a number of macroeconomic variables that are considered to affect consumption, such as income, interest rates, asset prices, and demographic changes.

Housing Investment

Housing investment -- which is spending by individuals on housing, such as new construction, enlargement, and renovation -- is also final demand related to the household sector. Housing investment only accounts for a small share of GDP. However, many materials and products, such as timber and metal goods, are used in housing construction. In addition, housing purchases are accompanied by consumption, such as replacing furniture and household electrical appliances. Thus, the effects of housing investment on the economy as a whole is larger compared with its share of GDP.

In analyzing housing investment, the Bank examines recent developments based on factors such as the number of housing starts and sales statistics of condominiums. The Bank assesses the outlook based on a number of macroeconomic variables, including income, interest rates, and demographic changes.

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