Annual Report on the Japanese Economy and Public Finance 2002-2003

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The Japanese economy passed the trough in the beginning of 2002 and entered a recovery phase. Although there was a time when the recovery came to a plateau, signs of an incipient recovery have come to be observed due to cyclical factors as well as the effect of structural reform that is gradually bearing results.

As production recovers in line with export growth pertaining to recovery of the global economy, the positive movements in the business sector will further increase, and as a result, the Japanese economy is expected to attain an incipient recovery. At the same time, however, the continued weakness of the economic recovery cannot be denied, considering that the positive movements in the business sector are partly accountable to the results of corporate restructuring and that the heavy burden of non-performing loans and excessive debts still remains.

In order to eliminate such weakness, to move toward self-sustained economic recovery, and to overcome deflation, further promotion of the structural reform is indispensable. It is important to recover the risk tolerance of financial institutions, enhance productivity growth through revitalizing the economy, reform the economic and social systems to match the current environment, and in particular ensure sustainability of the public finance and social security systems. The key point is to reform the current systems into systems that provide proper incentives in order to prevent postponement of measures to address problems.

Based on such recognition, the Annual Report on the Japanese Economy and Public Finance 2002-2003 discusses measures to put the economy onto a private demand-led self-sustained recovery path and to achieve robust economic growth in the medium and long terms. Through these analyses and examination, this report plays an important role of supporting the deliberations of the Council on Economic and Fiscal Policy from the perspective of economic analysis, and providing an analytical base to the structural reform that is being promoted by the Koizumi Cabinet. It is my hope that this report will help the nation to gain a better understanding of the Japanese economy and public finance and contribute to resolving these problems.

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