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ECONOMIC OUTLOOK AND BASIC POLICY STANCE ON ECONOMIC MANAGEMENT FOR FY 1999Approved by the Cabinet on December 20, 1998

Provisional translation by Economic Planning Agency


1. THE JAPANESE ECONOMY AND INTERNATIONAL ECONOMIC SITUATION IN FY 1998
(1) The Japanese Economy in FY 1998

The economic situation in Japan is extremely severe. Under waning confidence in the management of financial institutions and uncertainties over employment, households and businesses are adopting cautious stances, which result in decreasing final demand such as private consumption, private residential investment and non-residential investment.

Faced with this situation, in April, the Government compiled Comprehensive Economic Measures totaling over 16 trillion yen in programs, and in November drafted Emergency Economic Package totaling 17 trillion yen in stimulus programs or well over 20 trillion yen if permanent tax deduction is included.

While all of these measures will have their effects henceforth, the real GDP growth rate in FY 1998 is expected to be about -2.2 per cent as shown in the attachment listing as the main economic indicators for FY 1998.

(2) International Economic Situation Surrounding the Japanese Economy

The world economy is still beset with problems as seen in the currency and economic crises in the emerging market economies and the uncertainties over the future in the European countries and the US.

The Asian economies slowed sharply due to their financial and currency crises. And while the American economy is continuing to grow, some concerns arose over its future. The Western European economies are by and large continuing to expand as a whole, but there are concerns of slowdown in some countries.

2. BASIC POLICY STANCE ON ECONOMIC MANAGEMENT IN FY 1999

In view of the above situation, the government will adopt the following basic stance in management of the economy in FY 1999.

(1) Revitalization of the Japanese Economy

1) Basic Principle

In the government scenario for revitalization of the Japanese economy, FY 1999 is positioned as the year for turning around the economyšŚ┤ decline to clear positive growth. It is necessary to break the vicious cycles of recession, to prevent negative growth from continuing in three consecutive years, and to lay a firm groundwork for recovery.

Therefore, the basic stance taken in running the economy in FY 1999 will be, to consolidate the foundation for economic recovery, first, taking full steps to deal with the instability in the financial system and credit contraction - factors which can lead the entire economy to further depression. Besides, to transform the resultant business recovery to self-sustainable medium and long term growth, the stance taken will be generating sufficient demand stimulating measures in the short term and proceeding with structural reforms for strengthening the supply side. Therefore, the government will adopt a prompt and flexible approach in managing the economy.

2) Steps for Stabilizing Financial System, Easing Credit Contraction, and Dealing with Non-performing Loans

To stabilize the financial system - the most pressing issue at the present time - and restore domestic and overseas confidence in the Japanese financial institutions, the government will make appropriate use of Financial Function Early Strengthening Law and Law concerning Emergency Measures for the Revitalization of the Functions of the Financial System to re-capitalize financial institutions and will further improve examination and enhance supervision over financial institutions. Moreover, it will be moving forward forcefully with steps to deal with the credit contraction to prevent credit from shrinking due to the reluctance of banks to extend loans and banks? collecting their loans and thereby it enables small and medium sized businesses and other businesses to secure financing. Further, the government will be making use of a scheme for securitization of land and credit and promoting quick and substantive processing of the non-performing loans of financial institutions.

3) Economic Recovery Measures

With the triple goals for FY 1999 of, first, creating demand necessary to realize clear positive growth with confidence, second, promoting employment and establishment of new businesses so as to prevent unemployment from rising, and third, moving forward with international coordination, the government will proceed forcefully with its emergency economic policies and other measures, such as accelerating procedures for smooth outlays from the third supplementary budget of FY 1998.

Specifically, the management of the economy will assign the highest priority to business recovery such as by continued efforts to expand domestic demand, introducing substantial permanent cuts in personal income taxes and corporate income taxes, revising the tax scheme of housing loans deduction, and allowing immediate depreciation of information and communication equipment.

(2) Structural Reforms for Realizing "21st Century Type Society"

In the scenario for revitalization of the Japanese economy, it is necessary for the government to proceed with structural reforms to strengthen the supply side so as to realize a 21st century type society. Regarding the structural reforms of the fiscal system, the government will suspend the Fiscal Structural Reform Act for the time being, however, holding its basic approach of promoting reforms intact.

Further, it will draw up a medium term prospect on the state of the economy and possible approaches in policies.

1) Measures for the 21st Century

The government will proceed with its Leading 21st Century Projects, Strategic Plan to Double the Size of Living Space designed to give a more affordable and abundant lifestyle, and the Industrial Revitalization Plan aimed at creation of new businesses, etc. Further, it will emphasize such social infrastructure that is in truly required fields from a view in the 21st century.

2) Building a Small Government and a Competition-Oriented Society

Regarding administrative reforms, with the aim of transition to a new system in January 2001, the government will reorganize its central ministries and agencies so as to strengthen Cabinet function. Along with this, it will formulate the conversion of certain government functions to independent public corporations and with thorough reassessment of work. It will slim down the central ministries and agencies and will forcefully advance devolution. Further, it will continue the three-year plan for deregulation, will reduce intervention by the public sector and improve high cost structure.

The government will also steadily reform the financial system and construct a free and fair financial system comparable to those residing in New York and London. Further, it will work to transform the present system dependent on indirect financing to one on both indirect and direct financing.

To facilitate labor mobility, the government will reassess regulations on job placement services, worker dispatching services, etc. and promote projects of job skills development. Further, it will study the introduction of fixed contribution pensions scheme as a part of the pension system, and as a way of assurance of its portability to meet higher labor mobility.

3) Emphasis on the Perspective of Social Life and Construction of Efficient Safety Net

Regarding social welfare, it is vital to build a system that can be trusted by people and managed stably in the future. The government will advance structural reforms of the social welfare system such as streamlining and rationalizing the system while keeping harmony with economic circumstance and securing necessary benefit. Further, it will promote measures to alleviate the anxiety in daily life due to unemployment. Regarding the environmental issues, the government will be working on such as global warming, reduction of dioxins, endocrine disrupting chemical substances (so-called environmental hormones), etc.

(3) Constructive Supports for Asian Countries

The government will assist the economic recovery of the Asian countries afflicted by financial crisis and their efforts to restructure their economies by extending loans to those countries. Further, it will positively take part in studies at international forums on a desirable form of the international financial system with respect to such measures as to deal with short-term movement of capital. In addition, it will contribute to the maintenance and strengthening of the multilateral free trade system led by the World Trade Organization (WTO) and promote the liberalization and facilitation of trade and investment and economic and technical cooperation in the Asian Pacific Economic Cooperation (APEC) region.

3. ECONOMIC OUTLOOK FOR FY 1999

(Summary)

In FY 1999, measures for stabilizing the financial system, etc. will facilitate processing non-performing loans and reorganization of financial institutions, which means that the factors that have obstructed the recovery of the Japanese economy will be eliminated. Besides, economic recovery measures, including Emergency Economic Package, will ensure that public demand sustains the economy sufficiently and private demand recovers moderately. As a result, the real GDP growth rate in FY 1999 is expected to be about 0.5 per cent as shown in the attachment listing as the main economic indicators for FY 1999.

(Private Consumption)

Private consumption will head toward recovery, though slowly, as policy measures will prevent compensation of employees from falling and the effects of the permanent tax cuts will emerge.

(Private Non-Residential Investment)

Private non-residential investment will decrease due to a prolonged capital stock adjustment under a large excess of capacity.

(Residential Investment)

Residential investment will expand due to policy measures to promote housing construction, etc.

(Public Demand)

Public demand will increase reflecting the effects of the third supplementary budget of FY 1998, etc.

(External Demand)

In the global economy, while growth rates in European countries and the US are expected to decline somewhat, the slump in Asian economies is by and large likely to be over. Export volumes consequently will start rising again, though slightly. The growth rate of imports will turn to be positive reflecting trends in domestic demands, etc. Respective prices will decline sharply due to the exchange rate movement. As a result, the surpluses on the balance of trade and services (value) and the current account balance (value) will shrink slightly.

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