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Economic Outlook and Basic Policy Stance on Economic Management for FY 2001Approved by the Cabinet on December 19, 2000

Economic Planning Agency

1. The Japanese Economy and International Economic Conditions in FY 2000

(1) Economic management

During 1998, the Japanese economy remained in extremely severe conditions which could very well have been labeled a "recessionary vicious cycle." However, following the announcement of the Emergency Economic Package in November 1998, the economy successfully moved away from the critical situation which might have fallen into a serious deflationary spiral. Thereafter, by pursuing the Policy Measures for Economic Rebirth formulated in November 1999, the government has endeavored to promote further economic recovery and to realize economic and social structural reform.

As a result of these policy measures, the Japanese economy is experiencing a gradual recovery led by the corporate sector. However, conditions in the job market remain severe, while personal consumption continues to trace a flat trend. In response to these conditions, the Policy Package for New Economic Development Towards the Rebirth of Japan was determined in October 2000, and is currently being vigorously implemented. The objectives of this package consist of avoiding a sharp drop in public demand, reinforcing the advance of the Japanese economy toward a self-sustained recovery, and building an economy and society which match the needs of the 21st century.

(2) International economic conditions

A review of the international economic conditions affecting Japan indicates that conditions are generally moving in a positive direction with continued expansion in the U.S., European and Asian economies. On the other hand, such factors as the slowdown in the pace of expansion in the U.S. economy and trends in crude oil prices warrant careful monitoring.

(3) The Japanese Economy in FY 2000

Although the Japanese economy has yet to fully emerge from its severe conditions as evidenced by the lagging recovery of the household sector, the economy continues to move toward self-sustained recovery led by the corporate sector and on the whole the economy continues to improve gradually. With respect to the impact on economic conditions, following points should be borne in mind. Lagging improvements in employment situations, high level of corporate bankruptcies and total liabilities of failed businesses, falling land prices since the burst of the bubble economy with regional differences in their rates of decline, downward trend of stock prices since spring 2000, continuing excess capacity and excess debt despite some improvements made, etc. We expect that the movement toward self-sustained recovery will be spreading towards the end of FY 2000 with a gradual recovery in personal consumption reflecting income growth, and support for aggregate demand provided by the effects of the FY 2000 supplementary budget.

Given these developments, we project that the Japanese economy will achieve a real GDP growth rate of about 1.2% in FY 2000.

2. Basic Stance for Economic Management for FY 2001

Based on this view of the current conditions, appropriate and flexible economic management shall be pursued in FY 2001 with emphasis on the following three points.

(1) Realization of self-sustained economic recovery

The steady and smooth implementation of the Policy Package for New Economic Development Towards the Rebirth of Japan will be pursued in order to reinforce the advance of the Japanese economy toward self-sustained recovery. Also for that purpose, efforts will be made to maintain the same overall size of public works in the FY 2001 budget, as in the initial budget for FY 2000, and steps will be taken for appropriate implementation of the local public works while considering fiscal situation of local governments. In the tax system, a new tax incentive for housing loan will be introduced and other incentive measures for private investments including continuation of existing tax incentive for investments by small and medium sized enterprises will be taken.

In order to reinforce the advance of the Japanese economy towards self-sustained recovery, the Bank of Japan will be requested to continue its implementation of appropriate and flexible monetary policy, including the provision of ample and flexible supplies of funds to the markets, while taking into consideration relevant developments in the financial and foreign exchange markets.

(2) Promoting future-oriented economic structural reform

Efforts will be made to raise the level of medium- to long-term economic growth through the promotion of future-oriented economic structural reform and the realization of the IT revolution.

[1] Rapid Promotion of the IT revolution

Efforts will be concentrated on the following four priority areas: development of infrastructure for ultrahigh-speed information and communication networks; competition policies, rules for electronic commerce and the development of new regulatory environments; achievement of electronic government; and, strengthening the development of human resources.

[2] Responding to environmental problems

Efforts will be made to promote the development of a recycling society and to implement countermeasures against global warming and harmful chemical products, as well as to promote greening of business activities and products.

[3] Countermeasures for declining birth rates and the aging of society

Comprehensive reform on social security systems will be pursued through the activities of the Meeting of Social-security-reform Related Ministers and others. Efforts will also be made to make public spaces barrier-free, to improve the employment environment for the elderly and for those who both work and bring up children and to upgrade child-care services.

[4] Development of urban and life-related infrastructures

Efforts will be made to ease traffic congestions, develop comfortable and invigorating urban spaces, and to implement various measures pertaining to the development of life-related infrastructures and disaster prevention.

[5] Improving the business environment for industrial rebirth

Efforts will be made in the following areas: development and improvement of basic legal structures pertaining to corporate activities; setting up the tax systems for business reorganization, such as splitting or merger of businesses; development of employment system and human resource development system; development of infrastructures promoting creative technological innovation; policy measures targeting small- and medium-sized enterprises; stabilization of the financial system and the revitalization of the financial markets; and, the promotion of greater liquidity of claims and assets.

(3) Contributing to sustained development in the world economy

Efforts will be made to contribute to sustained development in the world economy through the following measures: maintaining and strengthening the multilateral trade system through the launching of the World Trade Organization's (WTO) new round of multilateral negotiations during 2001; developing a multi-tiered regional cooperative framework for the Asia-Pacific region including the Asia-Pacific Economic Cooperation (APEC) and the "ASEAN+3 Meeting"; strengthening the international financial system; and, supporting the Asian countries and others in the development of information societies.

3. Economic Outlook for FY 2001

During FY 2001, the Japanese economy will advance on the self-sustained recovery path as a pattern of private-demand driven economic growth centered on personal consumption and private non-residential investment will be established with the background of mild improvements in employment and income, and an upward trend in profits of the cooperation.

The Japanese economy is projected to show a real GDP growth of about 1.7% in FY 2001. Projections of other principal economic indicators for FY 2001 are shown in the attachment.

(1) Real gross domestic expenditure

[1] Personal consumption

Personal consumption will increase gradually as a result of continued improvements in employment conditions and compensation for employees. (Increase of about 1.5% over the previous fiscal year.)

[2] Private non-residential investment

Private non-residential investment will increase as a result of continued improvements in corporate profits. (Increase by about 3.8%.)

[3] Private residential investment

Private residential investment will decrease from the previous fiscal year. (Decline by about 1.9%.)

[4] Public demand

While public fixed capital formation will decrease, total public-sector demand will increase slightly over the previous fiscal year as a result of higher medical insurance payments and other factors. (Public demand will contribute about 0.2% to real economic growth.)

[5] External demand

As a result of a mild slowdown in the world economy, the growth rate of Japan's (real) exports of goods and services will decline slightly and the contribution of external demand will be below the level of the previous fiscal year. (External demand will make a negative contribution of about 0.0% to real economic growth.)

(2) Labor and employment

Conditions in the labor market will improve as a result of economic recovery, and the unemployment rate will decline slightly from the previous fiscal year. (Unemployment rate will be about 4.5%.)

(3) Industrial production

As a result of the recovery in the private demand, industrial production will continue to increase, though the growth rate will fall slightly. (Increase by about 2.4%.)

(4) Prices

The secular downward trend in the prices of electric machinery and other products will push domestic wholesale prices downward slightly. (Decline by about 0.4%.) Consumer prices will also move downward, though at a slower pace than in the previous fiscal year against the background of a mild increase in consumption. (Decline by about 0.2%.)

(5) Balance of payments

The surplus in the trade and services account as well as the current account surplus will decline somewhat. (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, which are difficult to foresee.


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