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

Summary

1. Current State of the Japanese Economy

2. Key Features of the Economic Outlook

a. Cyclical Factors Restraining Growth

b. Structural Factors Boosting Growth

c. Potential Sources of Uncertainty

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 and Fiscal 2005

Fiscal 2004: Third consecutive year of positive real growth, but with a movement into an adjustment phase in the second half

Outlook for fiscal 2005: Recovery to resume in the second half, the fourth consecutive year of positive real growth

1. External Demand: Exports to decline through the first half of fiscal 2005

2. Corporate Sector: Adjustments to continue through the first half of fiscal 2005

a. Production: Has already begun to decline

b. Corporate Profitability: Expect gradual deterioration, with declines to continue through the first half of fiscal 2005

c. Private Capital Investment: Will remain relatively weak through the first half of fiscal 2005

d. Private Inventory Investment: Moving into an adjustment phase

3. Household Sector

a. Employment: Conditions to deteriorate again in fiscal 2005

b. Incomes: No major improvement expected, and the margin of decline may expand in fiscal 2005

c. Private Consumption: Growth will weaken in fiscal 2005 as the employment and income environments deteriorate.

d. Private Residential Investment: Housing starts to be relatively firm in fiscal 2004, but experience a slowdown in fiscal 2005

4. Government Sector

a. Government Public Investment: Continued decline anticipated

b. Government Final Consumption Expenditure: Increase to continue because of expansion in social welfare related expenditures

5. Prices: Deflationary pressures recede temporarily