Annual Report on the Japanese

Economy and Public Finance

2002-2003

- No Gains Without Reforms III -

October 2003

Cabinet Office

Government of Japan


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Introduction

    With positive signs emerging for the Japanese economy, there are expectations for getting this positive trend securely on track and achieving an autonomous economic recovery. This can only be attained by keeping up the current strong measures addressing the structural problems facing the Japanese economy. In particular, the issue of financial and corporate restructuring and the issue of dealing with the impact of the aging and declining population, especially reform of public finance and social security systems, are pressing issues that allow no delay. Accordingly, the Annual Report on the Japanese Economy and Public Finance 2003 provides a future outlook for the economy and analyzes the immediate structural problems based on such awareness.
    Chapter 1 "Prospects for Economic Recovery" analyzes the potential outlook for the Japanese economy as it resumes recovery. For that purpose, it analyzes the resilience of the economy and the present state of deflation, as well as the impact of the current fiscal and monetary policy. Specifically, it first identifies the positive signs observed in the economy, then presents the basic scenario of the prospects, indicating a high probability of economic improvement. At the same time, it points out the risks and vulnerability involved in future economic conditions and highlights the requirements for bringing about an autonomous economic recovery.
    Chapter 2 "Rebuilding Finance and Enterprises" discusses the financial and corporate restructuring necessary for a robust recovery of private demand. The factors behind the presently declining function of indirect finance are the non-performing loans of financial institutions and the excessive debts of client enterprises, which are inextricably linked with each other. This chapter outlines the present state and challenges of these two problems. With regard to finance, it points out the importance of the incentive structures surrounding financial functions in addition to the promotion of non-performing loan disposal, while for enterprises, it indicates the significance of the efforts to improve profitability along with the efforts to reduce excessive debts. Additionally, it discusses the importance of employment policy for minimizing the employment/wage adjustment costs that would arise in line with the financial and corporate restructuring.
    Chapter 3 "Addressing Aging and Declining Population" features the aging and declining population in Japan, which is accelerating at a pace unprecedented in the world. While analyzing its impact on future economic growth, it examines the pressing issue of reforming the public finance and social security systems. In this part, it indicates that, although there is no need to be pessimistic about the economic impact of the aging and declining population, the actual future economic growth will largely depend on the future policy measures. Next, it shows that reform of the public finance and social security systems is an urgent task, and drastic reform is necessary to make the systems sustainable in the long term. Furthermore, it discusses the importance of establishing systems that are not easily affected by changes in population or economic growth, as well as the significance of making comprehensive system reform by achieving compliance with other systems.
    As these structural problems facing Japan require prompt measures, the Annual Report on the Japanese Economy and Public Finance 2003 aims at contributing in the various analyses required for such measures.

Column 0-1
The Council on Economic and Fiscal Policy (CEFP)

What is the Council on Economic and Fiscal Policy?
The Council was established in January 2001 in order to exercise the full leadership of the Prime Minister regarding economic and fiscal policy.

List of Members of the CEFP
Chairman: Junichiro Koizumi, Prime Minister
Member : Yasuo Fukuda, Chief Cabinet Secretary
Member : Heizo Takenaka, Minister of State for Economic and Fiscal Policy
Member : Taro Aso, Minister of Public Management, Home Affairs, Posts and Telecommunications
Member : Sadakazu Tanigaki, Minister of Finance
Member : Shoichi Nakagawa, Minister of Economy, Trade and Industry
Member : Toshihiko Fukui, Governor of the Bank of Japan
Member : Jiro Ushio, Chairman and Chief Executive Officer of USHIO INC.
Member : Hiroshi Okuda, Chairman of Toyota Motor Corp.
Member : Masaaki Honma, Professor, Faculty of Economics, Osaka University
Member : Hiroshi Yoshikawa, Professor, Faculty of Economics, University of Tokyo

Recent major activities:

June, 2001 Deliberation of the "Outline of Basic Policies for Macroeconomic Management and Structural Reform of the Japanese Economy" (so-called 'Large-Bone Policy') (Cabinet Decision, June 26)
August, 2001 Deliberation of the "Guidelines for the Estimate Budget Request" (Cabinet Agreement, August 10)
September, 2001 Deliberation of the "Reform Schedule - Main Points" (Delivered in Cabinet, September 25)
September - October, 2001 Deliberation of the "Front-Loaded Reform Program" (CEFP Decision, October 26)
November, 2001 Deliberation of the "Guidelines for Formulation of the FY 2002 Budget" (Cabinet Decision, December 4)
November, 2001 Deliberation of the "Immediate Action Program for Structural Reform" (CEFP Decision, December 14)
November - December, 2001 Deliberation of the "Structural Reform and Medium-Term Economic and Fiscal Perspectives" (so-called 'Reform and Perspectives') (Cabinet Decision, January 25, 2002)
February, 2002 Deliberation of the "Emergency Countermeasures to Deflation"
May-June, 2002 Deliberation of the "Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2002" (so-called 'Basic Policies 2002') (Cabinet Decision, June 25)
August, 2002 Deliberation of the "Basic Principles of the FY 2003 Budget" (August 2)
August, 2002 Deliberation of the "Guidelines for the Estimate Budget Request" (Cabinet Agreement, August 7)
October, 2002 Deliberation of the "Comprehensive Measures to Accelerate Reforms" (Formulated, October 30)
November, 2002 Deliberation of the "Guidelines for Formulation of the FY2003 Budget" (Cabinet Decision, November 29)
December, 2002 Deliberation of the "Accelerated Reform Program" (CEFP Decision, December 12)
November - December, 2002 Deliberation of the "Reform and Perspectives FY 2002 Revision" (Cabinet Decision, January 24, 2003)
June, 2003 Deliberation of the "Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2003" (so-called 'Basic Policies 2003') (Cabinet Decision, June 27)
July, 2003 Deliberation of the "Basic Principles of the FY 2004 Budget" (July 29)
August, 2003 Deliberation of the "Guidelines for the Estimate Budget Request" (Cabinet Agreement, August 1)
November, 2003 Deliberation of the "Guidelines for Formulation of the FY2004 Budget" (Scheduled)
November, 2003- January, 2004 Deliberation of the "Reform and Perspectives FY 2003 Revision" (Schedule)

Fore more information, please see the Website below:
http://www5.cao.go.jp/keizai-shimon/index_en.html


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