Introduction

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The Japanese economy is beginning to emerge from the period of long-term stagnation it faced after the collapse of the bubble economy. The economic growth rate was over 3% in FY2003, and there was a year-on-year decrease in the unemployment rate for the first time in 13 years. There has been positive forward momentum as of the middle of 2004 as well, including underlying strength in the household sector and an expansion of improvements in the corporate sector. The Koizumi Cabinet has positioned the period up to FY2004 as a concentrated adjustment period in reforms as well as a period during which to resolve the issue of nonperforming loans, and has been tackling reforms aimed at overcoming deflation and bringing about sustainable economic growth led by private demand. It appears that structural reforms have achieved a comprehensive result in removing the obstacles that have been depressing the Japanese economy for a long period of time.

In terms of the international economy, Japan's relationship with Asian economies has changed largely with increasing significance of China, which has maintained an economic growth rate of over 8% in recent years. These Asian economies have gone far beyond being placed as export markets, overseas production hubs and sources of low value-added products for Japanese companies, with close relationships starting to be built in terms of goods, services, capital and labor force. It has been established that this trend is leading to increased exports and is having a positive effect on the Japanese economy. An important factor, however, is for Japan to make active efforts in order for this new relationship to lead to the development of Japan in the 21st century.

Recognizing the importance of these issues, the Annual Report on the Japanese Economy and Public Finance 2004 will carry out the analysis in the three chapters below.

Chapter 1 analyzes trends in the Japanese economy. The chapter is roughly framed into 1） how economic growth is brought about centering on private demand including consumption and investment, 2） how the fruits of structural reform are beginning to take shape and 3） the current status of overcoming deflation and what policy issues exist. The chapter also looks at the future outlook for the economy in terms of sustainability.

Chapter 2 looks at the prospect for regional economic revival. Although economic indicators show that the Japanese economy as a whole has started to improve, trends in the recovery of regional economies are varied. This chapter identifies the causes of these disparities among regions and analyzes efforts for the structural reform of fiscal policy and regulations. The chapter also looks at revitalization measures which utilize the specific features of regions such as tourism.

Chapter 3 discusses new challenges posing the Japanese economy presented by globalization, and structural reforms necessary to address these issues. As the relationships between international economies are becoming increasingly close, the behavior of companies and households has been changing significantly. This chapter analyzes these changes and looks at the economic effects they are having. The chapter also outlines issues in the areas of the status of Japan's economic partnership with Asia, agriculture, inward direct investment and foreign workers, and clarifies structural reforms for drawing the maximum benefits in terms of the international economy.

In carrying out the analysis in these chapters, efforts were made to clarify actual trends based on the use of micro-data on households, companies and governments whenever possible. This year has been designated as the year for the completion of the concentrated adjustment period in reforms, and next year will mark the beginning of a period of strengthening efforts regarding priority issues in which full-scale efforts regarding reforms will be strengthened. This report aims to contribute to relentless efforts for structural reform through comprehensive analysis in Japan and abroad.

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