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QuestionWhat are the factors on which the Bank bases its assessment of economic activity? How does it assess developments in production as well as employment and income?

Answer

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. The Current Situation of Economic Activity and Its Outlook" in the Background section of the report assesses recent developments in and the outlook for final demand (expenditure in each economic sector). It also explains, as described below, how the Bank assesses developments in production as well as employment and income based on, for example, various statistics and interviews with firms.

Production and Inventories

Production and inventories are determined by developments in final demand. Firms conduct production activities according to their estimates of demand for their products. Manufactured products are shipped according to demand, and the remainder is stored as inventory. Firms intentionally hold a certain amount of inventory in order to be able to respond to a sudden increase in orders -- or increase in demand -- from their customers, but when sales of products are better (or worse) than expected, inventories decrease (or increase) accordingly. If product sales fall below the firm's projections and inventories exceed the firm's preferred level, the firm makes production adjustments in order to reduce inventories. Therefore, as the economy recovers, recedes, and recovers again, the level of inventory follows a cyclical pattern of increase and decrease. This trend in inventories is called an inventory cycle and is one of the factors for the Bank's assessment of economic activity.

The Bank assesses recent developments in production, shipments, and inventory of goods based on the Indices of Industrial Production, and the outlook based, for example, on probable future developments in final demand and interviews with firms.

In addition, the Bank comprehensively examines movements in the Indices of Tertiary Industry Activity, as they show the level of activity in nonmanufacturing industries (services industries) -- another important factor in the Bank's assessments of production.

Employment and Income

While employment and income are largely affected by the production activities of firms, household spending behavior, which is influenced by employment and income, has a large impact on final demand. For example, if the unemployment rate rises and wages decline due to a decrease in production, households will refrain from consumption, which in turn will exert downward pressure on the economy.

As for employment and income, the Bank assesses the employment situation from data such as the unemployment rate and the active job openings-to-applicants ratio; wages from statistics such as the Monthly Labour Survey; and the outlook for employment and income mainly from developments in production. In addition, considering how significantly wages are affected by base pay increases, which are normally made with the annual spring wage negotiations between labor unions and management, it is also important to analyze firms' wage-setting behavior using the results of these wage negotiations as well as interviews with firms.

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