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Forecast for the Japanese Economy in Fiscal 2001 and 2002: June 2001

Summary

1.Current State: Growing Concern about a Downturn

Real GDP growth in fiscal 2000 was +0.9%; although small, this represented the second consecutive year of positive growth for the Japanese economy. Nevertheless, the economy began to show signs of decelerating in the latter half of fiscal 2000, and, as a result of a slowdown in the United States and elsewhere in the world economy, exports from Japan began to lose momentum. Since the beginning of 2001, the pace of decline in industrial production has quickened. The rate of growth in corporate profits slowed in the January-March quarter, and growth in private capital investment has also weakened. In addition, the income and employment environments are becoming severer, and personal consumption is weak.

2.Outlook for Fiscal 2001 (+0.3% Real GDP Growth): Slowdown to Continue in First Half Followed by Recovery in the Second Half

The downtrend in the economy is likely to continue in the first half of fiscal 2001. First, the slide in exports will continue as the world economy slows. Inventory adjustments are already in progress, and the decline in industrial production will continue during the first half of the fiscal year, while private capital investment will be restrained. Since growth in wages will remain stagnant, personal consumption will remain virtually level. Private housing investment is forecast to decline, as the number of owner-built housing starts continue downward.

The economy is expected to bottom out in the second half of fiscal 2001. This will be because the world economy will begin to recover as the effects of the relaxation of monetary policy are felt in the United States. The recovery in export demand is expected to bring an increase in production and the adjustment in inventories within reach. As a result of the expansion in production, the utilization of capital equipment will rise, and corporate profitability will recover gradually, and, for these reasons, private capital investment will begin to expand again. Even if corporate profitability recovers, however, restraints on personnel costs are expected to remain strong, and recovery in individual incomes will be limited. Nevertheless, personal consumption will recover gradually and provide support for the recovery.

Compared to our March forecast, we have lowered the rate of growth for fiscal 2001 from +1.0% by 0.7 percentage point, to 0.3%, for the following reasons: (1) Since the slowdown in the world economy came more quickly than expected, we have reduced the contribution of external demand by 0.2 percentage point. (2) We have reduced the contribution of public investment 0.3 percentage point because of a change in the underlying assumption in the previous forecast, which was that the government would prepare a package of economic policies that would include \3 trillion in pump-priming expenditures, half of which would be spent during fiscal 2001. In addition, since deflationary pressures will continue, GDP in nominal terms is forecast to drop 0.7%, the fourth consecutive year of declines in nominal GDP.

3.Outlook for Fiscal 2002 (+2.2% Growth): Recovery in Domestic Private Demand but a Slowing in the Second Half

As during the latter half of fiscal 2001, in fiscal 2002, expansion in exports will bring increased production, and the economic recovery will continue. Capital investment will also rise, propelled by replacement investment, and, along with the recovery in incomes, private consumption will increase, thereby bringing economic recovery led by domestic private demand. Growth in nominal GDP will rise to +1.3%, the first positive figure in five years. However, the recovery in private capital investment on a year-on-year basis will peak in fiscal 2002, and there is a possibility that the economy will slow in the latter half of fiscal 2002.

4.Performance of Overseas Economies a More Important Risk Factor for Economic Downturn than Domestic Structural Reforms

The view is growing stronger that such measures as the restructuring of government finances, the final disposal of nonperforming loans in the banking sector, and other structural reforms will place deflationary pressures on the economy. Clearly, as a result of the failure to implement another economic stimulus package (with about \3 trillion in pump-priming expenditures), simulations show that real economic growth in fiscal 2001 will be 0.3 percentage point lower than it would have been with the package. However, public investment has been on a downward trend for the past several years, and it can be said that a continuation of this decline will lead to fiscal restructuring. The final disposal of nonperforming loans (by removing them from the balance sheets of financial institutions) is in progress. There is a possibility that this process of final disposal may be accelerated, but nothing completely new is about to begin. The risk of a downturn seems likely to be more closely linked to trends in overseas economies than to progress toward structural reform in Japan.