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Forecast for the Japanese Economy In Fiscal 2004 and 2005: May 2004

Summary

1. Current State of Japan's Economy and Summary of the Outlook

1. Current State of the Japanese Economy

2. Key Features of the Economic Outlook

a. Recovery in the World Economy and Expansion in Exports

b. Recovery in Corporate Profitability and Expansion in Capital Investment

c. Recovery Spreading to the Household Sector

d. Possibility of an End to Deflation

2. Outlook for the Economy in Fiscal 2004 and Fiscal 2005

1. Assumptions Underlying the Forecast

a. World Economy

b. Exchange Rates

c. Crude Oil Prices

d. Government Fiscal Policy

e. Monetary Policy

2. Economic Outlook for Fiscal 2004: Third consecutive year of positive growth, movement into an adjustment phase in the second half

3. Economic Outlook for Fiscal 2005: Recovery to resume in the second half, the fourth consecutive year of positive growth in real terms

3. Outlook by Demand Component

1. External Demand: Outlook for negative contribution beginning in the latter half of fiscal 2004

2. Corporate Sector: Strong performance to peak out in latter half of fiscal 2004

a. Production: Will continue to rise through first half of fiscal 2004, but momentum will weaken in the second half

b. Corporate Profitability: Profits to continue to rise, but downward pressures will emerge in the latter half of fiscal 2004

c. Private Capital Investment: Forecast to peak out in mid-fiscal 2004

d. Private Inventory Investment: Fluctuations to remain small.

3. Employment and Income Environments: Will deteriorate in fiscal 2005, and growth in the individual sector will slow

a. Employment: Improvement in the employment environment to continue throughout fiscal 2004 but weaken in fiscal 2005 due to the impact of the economic slowdown

b. Incomes: Will rise throughout fiscal 2004 but begin to decline entering fiscal 2005

c. Private Consumption: Growth will gradually decline as the employment and income environments deteriorate.

d. Private Residential Investment: Housing starts to remain weak in fiscal 2004 and thereafter

4. Government Spending: Government public investment will continue to decline, but government consumption expenditures will make a positive contribution to growth.

a. Government Public Investment: Decline to continue

b. Government Final Consumption Expenditures: Increase will continue as expenditures on health care and nursing grow

5. Prices: Prices to begin to decline again in fiscal 2005

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