Annual Report on the Japanese

Economy and Public Finance


- No Gains Without Reforms III -

October 2003

Cabinet Office

Government of Japan

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Chapter 1

Prospects for Economic Recovery

    The Japanese economy experienced a trough in January 2002 and entered a recovery phase of the business cycle. However, the recovery was somewhat bumpy. Export and industrial production continued to grow immediately after the bottoming out, but from the end of 2002 to the beginning of 2003, weak signs were observed and the recovery came to a halt. Despite this situation, however, corporate profits and business investment have improved, and the economy has come to show signs of an upturn since the fall of 2003.
    This chapter aims to analyze this current state of the economy and its future prospects. In Section 1, we will analze the driving force of the current economy and the spread of its effects, as well as study the positive signs that are emerging mainly in the business sector despite the weakness of the overall economy. Then, in Section 2, we will examine the current state and the background of the deflation that lingers under these economic trends, and consider the requirements for overcoming the deflation. Next, in Section 3, we will analyze what kind of impacts the macroeconomic policies have had on the economy and deflation. Finally, in Section 4, we will discuss the possible prospects for the economy in the future based on these analyses.

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