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Forecast for the Japanese Economy in Fiscal 2000 and 2001: June 2000

Summary

1. Positive Growth in Fiscal 1999, the First in Three Years

Japan's GDP rose 0.5% in real terms in fiscal 1999, the first increase in three years. This movement back into the plus range suggests the economy is continuing to recover despite instabilities on the demand side. Industrial production began to trend upward beginning in spring 1999, led principally by IT-related items, thus corporations moved from a period of reducing unintended inventories to a period of inventory investment. In addition, private capital investment began to rise in the October-December quarter of 1999 and continued on an upward trend for the second quarter in the January-March period of 2000, driven by IT-related investments. However, the economy has just entered the stage where it is building a foothold for self-sustaining recovery. Indicators such as the sharp rise in bankruptcies--which had been on the decline--and continued high unemployment rates, suggest the economy has not escaped from the restraining effects of structural adjustments.

2. Fiscal 2000: Capital Investment to Lead Second Year of Positive Growth

Real GDP in fiscal 2000 is expected to show the second consecutive year of positive growth as expansion in private capital investment leads the recovery, but growth will remain at a low 0.9%. Excluding capital investment and net exports, other components of final demand are expected to remain weak. GDP at current levels is already 0.8% above the average level of Fiscal 1999, suggesting that the recovery trend this fiscal year will remain weak. In addition, since the momentum of recovery will still be weak because of the decline in public investment in the second half of the fiscal year, concern about future trends may grow toward the end of the fiscal year.

Private capital investment, especially in electrical equipment, is expected to remain firm for the time being and will provide the driving force for the economy as a whole. Nevertheless, many corporations still have excessive levels of borrowings, implying that a sharp rise as in previous recovery periods is unlikely. Moreover, there appear to be limits to the degree that the increase in capital investment can bring higher levels of production and employment and push incomes and consumption upward.

3. Fiscal 2001: Third Consecutive Year of Positive Growth

Real GDP is expected to grow 1.3% in fiscal 2001, the third consecutive year of expansion. However, during the first half of fiscal 2001, production may experience a cyclical downtrend due to inventory adjustments. Growth in consumption will remain low because of the slow expansion in incomes. In addition, private capital investment, the driving force for the recovery, will remain strong in fiscal 2001, but the rate of expansion will decline.

Consequently, the government is believed likely to make an allocation of \3 trillion in pump-priming expenditures as an additional economic measure, which will boost real growth by 0.5 percentage point. And also, the government is likely to extend the favorable tax treatment for new housing purchases to June 2002. This extension of the favorable tax treatment for new housing may bring a surge in demand for housing construction toward the end of the fiscal year.

Although economic growth will be positive in fiscal 2001, economic policies will be compensating for slow growth in domestic private demand. This suggests that it will be difficult to describe this growth as self-sustaining in the true sense. There are limitations on economic growth that is dependent on private capital investment. As the recovery will not be supported by growth in consumption based on improvements in employment and incomes, the pace of economic recovery will continue to be slow.

4. Conclusion

For the Japanese economy to achieve a true self-sustaining recovery, it will be necessary for individual corporations to take further steps toward reducing their "three excesses," namely excess capital equipment, high levels of borrowings, and excess workforce. Progress is being made toward reducing equipment and borrowings, but relatively little headway has been made toward eliminating excess employment. To achieve recovery that is truly self-sustaining and robust, however, this problem must be addressed, even if it is accompanied by temporary adjustment pains.