Economic Outlook and Basic Policy Stance on Economic Management for FY 1997 Approved by the Cabinet on December 19, 1996.

Provisional Translation

1. The Japanese Economy and the International Economic Situation in FY 1996

1) The Japanese Economy in FY 1996

The government has diligently pursued a series of economic management policies; it decided the largest economic package ever in terms of working expenditures in September 1995, and undertook a reconsideration of the Deregulation Action Program in March 1996. Further, six laws relating to the financial system were enacted in June, and progress was made in solving the problem of non-performing assets, beginning with the disposal of the jusen problem. With these measures, the Japanese economy continues to tend toward recovery. Although the pace of recovery is gradual, demand in the private sectors is gathering the strength of steadiness. Thus, the basis for an autonomous economic recovery centered on private demand is being established. However, the employment situation is still serious despite its continued improvement.

As a result, Japan's gross domestic product is expected to grow by about 2.5 percent in real terms in FY 1996, as shown in the attachment listing the main economic indicators for FY 1996.

2) The International Economic Situation

Considering the economic situation outside Japan, the world economy as a whole is continuing its expansionary trend. The US economy is steadily expanding and the western European economies are in general slowly improving, with some expanding. The Asian economies are also still expanding as a whole, even though growth in East Asia is slowing down.

2. Basic Approach to Economic Management for FY 1997

Given the above conditions, the government will carry out appropriate and responsive economic management policies for FY 1997 so as to realize an autonomous economic recovery. At the same time, it will tackle administrative and fiscal reform as well as structural reform of the economy and society in order to increase the flexibility and efficiency of the economy as a whole. Efforts will be made to carry out the nation's international responsibilities and to proceed with creating a society and economy in which all can experience prosperity and live in security. Through these measures, a foundation for sustained growth will be formed. Grounded on this fundamental understanding, the basic approaches for economic management for FY 1997 are outlined below:

1) Realizing an Autonomous Economic Recovery

In FY 1997, an autonomous economic recovery led by increasingly firm private demand will be realized. To that end, the government will manage the economy in an appropriate and responsive manner while paying close attention to economic developments. In addition, efforts to stabilize foreign exchange will be maintained, and suitable and flexible monetary policies will be implemented while carefully observing the situations at home and abroad.

2) Promoting Structural Reform of the Society and the Economy

In light of the inroads globalization has made, it is necessary to increase the efficiency and flexibility of the Japanese economy and society and to lead the move of the economic recovery to a form of sustained growth driven by domestic demand. If the current situation is left untouched, there is a fear that the hollowing out of industry and employment under a high-cost structure, the rapid aging of society, and a drastic worsening of public finances will multiply national burden and drain Japan's social and economic vitality. To break through these structural bottlenecks in the society and the economy, the government will, comprehensively and in unison, pursue reforms of administration, fiscal structure, economic structure, financial system, and social security structure.

Working on the "Program for Creating and Reforming the Economic Structure," the government will promote the creation of new fields of industry by maintaining an environment in response to the needs of each industrial field and by coping with common problems of financial and human resources, as well as technology. Also, the formation of an internationally attractive business environment will be facilitated by deregulation and institutional reforms related to corporation and labor.

In addition, the "Social and Economic Plan for Structural Reforms" and the "Action Plan for Rectifying High-Cost Structures and Promoting Dynamism" contained therein will be steadily implemented. With regard to eliminating and easing regulations, the government will, while respecting the opinions of the Administrative Reform Committee to the greatest extent, revise and promote the Deregulation Action Program centered on the fields of advanced telecommunications, physical distribution, finance, land and housing, employment and labor, and medical care and welfare. Competition policy will also be actively promoted.

For reform of the financial system, the government will work on the principles of "free, fair, and global" with the aim of revitalizing the nation's financial market as an international financial market comparable with New York and London.

Finally, measures for small and medium-sized firms to promote structural reform and the strengthening of the business environment, along with employment measures such as job creation and labor turnover without unemployment, will be adopted. In addition, the implementation of the "Science and Technology Basic Plan" will be promoted.

3) Promoting Administrative and Fiscal Reform

Keeping in mind the proper function of the state in the 21st century, the government will establish an administration that is slim, efficient, and that can maintain the people's trust. Greater local autonomy and the disclosure of government information will be promoted to this end.

At present, there is a huge amount of government debt in public finance. The severity of the problem is increasing due to the expansion of the government bond redemption burden. There is a need to construct a fiscal structure that would not bring about an increase in the amount of outstanding public bonds to deal with the aging of society, the maintenance of social overhead capital, and increasing responsibilities in the international community in appropriate manner.

In terms of revenue for FY 1997, the first year of structural fiscal reform, the rate of consumption tax will be raised from 3% to 5% including the establishment of the local consumption tax as a part of the tax reform in the fall of 1994. Taking the current economic conditions as well as the severe fiscal situation into consideration, the temporary reduction of income tax and local inhabitants tax is terminated. In terms of expenditures, the budget will be apportioned in order of importance by abolishing and reevaluating the system at its very foundation and by making tough choices on the priority of programs.

4) Attaining a Better Standard of Living

Coping with such problems as anxieties over an aging society with fewer children, delays in establishing sufficient social overhead capital and better quality of housing, the existence of price differentials between Japan and other nations, and environmental problems, the government will work to create a prosperous and secure society and economy.

Structural reform of the social security system will be carried out to establish an efficient system that can respond appropriately to the changing needs of the society, that can balance between payments and contributions, and is compatible with the economic activity. Through the Basic Plan for Public Investment, the government will prioritize allocations for projects that directly lead to improvements in the quality of people's lives or that will become the foundation for the growth of the next generation. These will be promoted as efforts are made to heighten the efficacy of investments through coordinating among ministries, reducing construction costs and making use of cost-effect analysis. Finally, the government will promote the formation of spacious housing and living environments, continue efforts toward reconstructing the earthquake-damaged Hanshin/Awaji area, and pursue the creation of communities and a nation that are disaster-resistant.

5) Fulfilling Japan's International Role

To fulfill the nation's responsibilities in the global economy, the government will maintain and strengthen the multilateral free trade system centered around the World Trade Organization and contribute to the sustainable development of the world economy through financial cooperation, including official development assistance. In addition, efforts will be made to establish harmonious external economic relations through improving market access. Through APEC, while steadily implementing the Manila Action Plan, the government will take up the two central axes of liberalizing and facilitating trade and investment, and promoting economic and technical cooperation.

3. Economic Outlook for FY 1997

1) The Economy in FY 1997

Although the economy will slow down in the first half of FY 1997 due to such factors as the increased consumption tax, it will, when coupled with the implementation of structural economic reform including deregulation, thereafter gradually reveal an autonomous recovery led by private demand and open the road for sustained growth under the economic management detailed above.

First, it is expected that employment income will continue to pick up slowly due to improvements in the employment environment. Although there will be a reaction in demand immediately accompanying the rise in the rate of the consumption tax, in general, private consumption will continue its slow recovery. While consumer prices will rise because of the increased consumption tax, they will basically stabilize because of structural changes on the supply side.

Second, it is expected that private plant and equipment investment will be positively influenced by increases in production and improvements in corporate profits, and that new investment opportunities that are awaiting structural economic reform will emerge. Thus, even though there are sectors that will continue to experience post-bubble effects, given that the recovery that began in large manufacturing enterprises is evidently broadening to small and medium-sized firms and non-manufacturing firms, investment will largely continue its upward trend.

Although there will also be a reaction in demand in housing to the consumption tax hike, private residential investment will remain high.

In this way, production, corporate profits and personal income are mutually recovering together, with private demand slowly leading the economy as a whole.

On other fronts, public demand will tend to stabilize in reaction to structural fiscal reform.

While it is expected that imports will continue to expand due to the increase in imports of manufactured goods, exports will also grow given the expansionary tendency in overseas economies. The reduction of the surpluses in both the trade and service accounts and the current account will continue at a slower pace.

Although the employment situation will continue to be severe, it will progressively improve in line with the recovery of the economy.

2) Growth Rate and Other Indicators for FY 1997

In this way, the growth of Japan's gross domestic product in FY 1997 is forecast at about 1.9 percent in real terms, as shown in the attachment listing the main economic indicators for FY 1997.