Annual Report on the Japanese

Economy and Public Finance


- No Gains without Reforms II -

November 2002

Cabinet Office

Government of Japan

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Annual Report on the Japanese Economy and Public Finance 2001-2002
   The Japanese economy bottomed out in early 2002, supported by export growth and an end to the decline in production. As for the outlook for the economy, if the export growth and the pickup in production continue and lead to an increase in corporate profits and the improvement of the employment and income environments, it is expected that private demand will recover gradually. The recovery power of the economy still remains fragile, however, as the employment and income environments remain severe and uncertainties about the future are increasing, reflecting rising concerns about the future course of the U.S. economy and declines in stock prices.
   Ten years have already passed since the collapse of the bubble economy and the economy is about to enter its third recovery phase. The last two phases of recovery proved to be short-lived, ending without the achievement of a full-scale recovery. Against the background of the prolonged stagnation of the economy lie the facts that after the collapse of the bubble economy, balance sheet adjustments by corporations and banks and the adverse impact of deflation have been consistently putting downward pressures on the real economy and that, due to its inefficient economic structure, Japan has lost the capacity to adapt itself to the changes in the economic environment, such as the rapid rise of China in terms of the international division of labor. Therefore, the most important problem facing Japan is to emerge from the deflation by revitalizing the economy through structural reform and turn the bottoming out of the economy into strong economic growth led by private demand.
   To that end, it is necessary to carry out comprehensive and drastic tax reform placing priority on restoring the economic vitality of Japan to uplift productivity by enhancing efficiency and productivity in such fields as corporate management, allocation of resources such as labor and capital, and research and development and to dispel concerns about the "hollowing out of industry" . In order to revitalize the Japanese economy, it is essential to carry out reform of the financial system, such as accelerated disposal of non-performing loans. In doing so, it is also important to strengthen the management bases of financial institutions, to reorganize industries, and to promote early-stage rehabilitation of corporations, while paying close attention to the impact of these on employment and small and medium-sized enterprises.
   It is natural that structural reform through drastic changes in the conventional economic system is accompanied by a feeling of uneasiness. However, we have to recognize that we cannot regain the lost economic vitality without the rebirth of the Japanese economy through structural reform.
   Based on the above recognition, the Annual Report on the Japanese economy and Public Finance 2001-2002 discusses measures to put the economy onto a sustainable recovery path led by private demand and to bring about strong growth through the revitalization of the economy. This report plays the role of supporting the deliberations of the Council on Economic and Fiscal Policy from the perspective of economic analysis, as was the case with last year' s report. It is designed to give an analytical base to the structural reform that is being promoted by the Koizumi cabinet. It is my hope that this Report will help to better understand the Japanese economy and public finance and contribute to resolving these problems.

November 2002
Heizo Takenaka
Minister of State for Economic and Fiscal Policy

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