Annual Report on the Japanese Economy and Public Finance 2005

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Since the inauguration of the Koizumi Cabinet in 2001, the Annual Report on the Japanese Economy and Public Finance has broken away from its conventional form and five editions have been published to date. The Koizumi Cabinet has put all efforts into advancing structural reform under the principle of "No Gains Without Reforms." In the Annual Report on the Japanese Economy and Public Finance the advancement seen in the structural reforms and the current status of and the challenges faced by the Japanese economy have been analyzed in detail.

Reflecting back, the Japanese economy is continuing its recovery for three and a half years since the early months of 2002 and has steadily kept to a modest recovery phase led by private demand without relying on additional government expenditure. In the meantime, disposal of non-performing loans has been steadily advanced based on the goal to halve the non-performing loans ratio of major banks in a three-year period stipulated in the Program for Financial Revival announced in October 2002. This goal has been accomplished at a quick pace with the said ratio cut down to less than 3% by the end of FY2004. Furthermore, with progress seen in the disposal of non-performing loans by financial institutions, the excesses in employment, capital stock and debt at corporations have been largely eliminated. As a result, the business sector has been strengthened, which has brought positive effects to the household sector through improvement in employment. There still remain issues such as slowdown in the pace of economic recovery since the second half of FY2004 as deflation persists in a modest manner and imbalances are seen in the level of recovery among regions. However, in terms of the realization of private demand-led recovery without depending on government expenditure, it could be said that the Japanese economy has definitely broken out of the so-called "Post-Bubble Period." Now that the Japanese economy has escaped its long-term stagnation after the burst of the bubble, Japan has reached its time to shift from the phase of "defensive reform," in which efforts are given to resolve negative legacies, to the phase of "offensive reform," in which structures for a new growth are to be sought in order to achieve sustainable growth.

Based on such recognition, this report shares the current status and challenges of the policy of "from the public to the private sector," which is the basic concept in advancing the "offensive reform." We have analyzed in this report that realization of a small government and full utilization of the latent potentials of the private sector are important. This shall be realized through thorough dissemination and practice of the policy "leave to the private sector what it can do" including the privatization of the postal services, as well as advancing liberalization under the policy of "from the public to the private sector" including market testing in a comprehensive manner. Moreover, 2007 will mark the start of a decrease in the overall Japanese population and the first baby boomer generation (or the "Dankai generation") born after the Second World War will reach the mandatory retirement age. Therefore, in this report the need to predict the impacts that these demographic changes will have on household consumption and savings, the labor market and other factors is proposed. It also provides recommendations for preparations and countermeasures to be taken for such changes.

It is my hope that this report will help heighten people's recognition of the Japanese economy and public finance, gain people's better understanding of the purpose of structural reform advanced by the Koizumi Cabinet, as well as contribute to resolving the problems faced by the Japanese economy.

July 2005

Heizo Takenaka
Minister of State for Economic and Fiscal Policy

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