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Economic Outlook and Basic Policy Stance on Economic Management for FY 2000Decided by the Cabinet on January, 28. 2000

Economic Planning Agency


1. The Japanese Economy and International Economic Conditions in FY 1999

(1) Economic management

Against a background of sagging confidence in the financial system and growing insecurity in the labor markets, the Japanese economy faced severe conditions around the autumn of 1998 referred to as a "recessionary vicious cycle." To overcome a financial crisis and the downturn in economic activity, the government resorted to all available fiscal, monetary, tax and legal policy measures, including the Emergency Economic Package announced in November 1998. Parallel action was taken in the area of structural reform such as reforming the financial system, bolstering industrial competitiveness, creating new employment opportunities, reforming the labor market, and fundamentally revamping and improving government policies pertaining to small and medium enterprises.

While private demand remains weak and severe difficulties persist, as a result of these efforts, the Japanese economy is now experiencing a moderate improvement. In order to provide fresh momentum to the economic recovery and to promote the necessary reforms in the nation's socioeconomic structure, the government formulated the "Policy Measures for Economic Rebirth" on November 11th in 1999 and is now focusing its energies on implementing these measures forward.

(2) International economic conditions

The global economy is generally moving in a positive direction. While the U.S. economy faces some uncertainties, it continues to expand and is making good progress in the process of knowledge-oriented structural transformation. In general, the European economy is showing stronger signs of improvement. As for the Asian countries, the extremely severe economic conditions which persisted during 1998 have given way to a process of rapid recovery since the start of 1999.

(3) The Japanese economy in FY 1999

The Japanese economy continues to improve at a mild pace. This can be attributed to such factors as the impact of policy measures and the Asian economic recovery. However, thus far, the economy has failed to attain a self-sustained recovery led by private demand.

Given these developments, we project that the Japanese economy will achieve a real GDP growth rate of about 0.6% in FY 1999. Projections of other principal economic indicators are shown in the attachment.

2. Economic Management Goals for FY 2000

Based on this view of the current conditions, economic management for FY 2000 shall be based on the following three goals.

(1) Achievement of full-fledged recovery led by private demand

(2) Pursuit of structural reform aimed at developing a socioeconomic framework suited to the needs of the knowledge-based age

(3) Maintaining and bolstering the multilateral trade system, and promoting economic cooperation with the Asian region

3. Basic Stance for Economic Management for FY 2000

In order to achieve the above objectives, the following four points will be emphasized in operating appropriate and flexible economic management in FY 2000.

(1) Achievement of full-fledged economic recovery?passing the baton from public demand to private demand

Efforts will be made to ensure a smooth passing of the baton from public demand to private demand. Specifically, action will be taken to reduce the sense of insecurity in the job market, stimulate the creation of new businesses, and to boost consumer demand. These measures will aim to put the economy on the path to full-fledged private-demand-based recovery in the second half of FY 2000.

From this viewpoint, action will be taken to ensure the steady and smooth implementation of the Policy Measures for Economic Rebirth. The overall size of public works in the FY 2000 budget should be on a par with the initial budget for FY 1999. Steps will be taken for appropriate implementation of the public works budget while taking into consideration the fiscal standing of local governments. In tax system, private investment will be stimulated through such measures as the extension of eligible period for applying housing loans deduction and immediate depreciation allowance of information and communication equipment.

(2) Promoting solid progress in structural reform

The following measures will be promoted to create a firm foundation for the rebirth of the Japanese economy. Furthermore, in accordance with the "Ideal Socioeconomy and Policies for Economic Rebirth," conventional approaches will be modified to lend fresh impetus to the process of structural reform from the perspective of both hardware and content.

1) Promoting small and medium enterprises and start-up businesses

As a leading source of dynamism in the Japanese economy and the foundation of local economies, efforts will be made to promote the development of small and medium enterprises. In order to support a broad range of new businesses and to nurture start-up companies, smooth acquisition of human resources though such measures as special treatment of stock-option systems will be promoted. Moreover, smooth supply of funds from diversified sources will be promoted through such measures as the policy loans for companies that have difficulty in acquiring funds as well as the creation of a special tax treatment on profits from selling stocks of specified small and medium enterprises on which "angel tax system" is applied.

2) Bold measures for promoting information technologies

Prompt measures will be taken to promote the development of high-speed and high-volume information and communication networks, greater use of information technologies in education, the realization of "on-line government," creation of a legal framework for electronic commerce, and the development of information content.

3) Prioritized investment in social infrastructure as a basis for future development

Priority will be assigned to social infrastructure investments which will provide a basis for future growth and development, such as the development of high-speed transportation systems, the reconstruction of urban and regional infrastructure, and comprehensive countermeasures for relieving traffic congestion.

4) Expanding the economic frontiers in the new millennium

The Millennium Projects will be promoted to create a foundation for expanding the economic frontiers in the new millennium. These will consist of technology development projects responding to emerging needs in the three priority areas of the information age, the rapid aging of society, and environmental challenges.

(3) Realizing a safe, secure, and enjoyable citizen's life

Measures will be taken to realize a safe, secure, and enjoyable citizen's life which constitutes a fundamental prerequisite for releasing the dynamism of private-sector economic entities. For this purpose, the following lines of action will be pursued.

1) Measures for reducing the insecurity in labor markets and increasing job security will be taken such as reforming the employment insurance system, expanding the scope of measures promoting the employment of higher-age groups, encouraging the creation of new employment opportunities, and promoting greater mobility of human resources.

2) Measures will be taken to develop a stable social security system capable of responding to the future needs engendered by the aging of society and the dropping birthrate.

3) Measures will be taken to realize a safe, secure, and enjoyable social environment.

4) The development of an environmentally sound socioeconomic framework will be promoted.

5) Steps will be taken to stabilize the financial system, including the provision of larger volumes of government bonds to protect depositors.

6) New systems will be developed to match the requirements of the age of deregulation, such as market rules pertaining to the relation between consumers and producers.

(4) Contributing to sustained development in the world economy

Maintaining and bolstering the multilateral trade system constitutes a vital issue for the world economic system. As such, efforts will be made to ensure the early launching of the World Trade Organization's (WTO) new round of multilateral negotiations. Furthermore, Japan will play an active role in promoting economic cooperation in the Asian region through various organizations and forums, including the Asia-Pacific Economic Cooperation (APEC). Moreover, efforts will be made to stabilize and strengthen the international financial system.

Japan will seek to contribute to sustained development in the world economy through these initiatives. Japan will also support the Asian countries in their efforts to achieve economic recovery and economic structural reform by continuing to provide official development assistance and other government funds.

4. Economic Outlook for FY 2000

Many uncertainties remain in formulating an economic outlook for FY 2000, including the progress being made in the adjustment of employment and capacity, and international economic developments. However, the implementation of the Policy Measures for Economic Rebirth and other necessary measures will lead the economy to a path of private-demand-based full-fledged recovery in the second half of FY 2000.

The Japanese economy is projected to achieve the real GDP growth of about 1.0% in FY 2000. Projections of other principal economic indicators for FY 2000 are shown in the attachment.

(1) Real GDP

1) Personal consumption

Although employment conditions remain in a transitional phase, personal consumption will rise slowly as compensation for employees begins to increase. (Increase by about 1.0% over the previous fiscal year.)

2) Private non-residential investment

As a result of the improvements in corporate confidence and the recovery of profits, non-residential investment will increase, particularly in the second half of FY 2000. (Increase by about 1.4%.)

3) Private residential investment

Although the measures for promoting home construction are expected to have a positive impact, housing investment is expected to decline slightly from the previous fiscal year. (Decline by about 1.6%.)

4) Government expenditure

Given the positive impact of the second supplementary budget for FY 1999, government expenditure will increase slightly over the previous year. (Increase by about 0.5%.)

5) External demand

Notwithstanding the appreciation of the yen, (real) exports of goods and services will increase as a result of the recovery in the world economy, external demand will increase slightly over the previous year. (External demand will contribute about 0.1% to real economic growth.)

(2) Labor and employment

Although conditions in the job market indicate that labor adjustment pressures remain strong, the unemployment rate will decline slightly as a result of economic recovery. (Unemployment rate will be about 4.5%.)

(3) Industrial production

An upward trend in industrial production will be maintained. (Increase by about 2.2%.)

(4) Price

Higher oil prices and economic recovery will reduce the downward trend in domestic wholesale prices. (Decline by about 0.1%.) Consumer prices will move marginally higher. (Increase by about 0.3%.)

(5) Balance of payments

As a result of higher oil prices, import values will rise faster than export values. Consequently, the trade and services account surplus and the current account surplus will decline somewhat from the previous year. (The current account surplus will amount to 2.3% of GDP. )

[Note]

The figures in the Main Economic Indicators are to be interpreted with some margin as Japan's economy is led by the activities of the private sector and there are numerous factors particularly in the external environment difficult to foresee.

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