introduction

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The Japanese economy has gone through structural adjustment in order to resolve three excesses in employment, capital stock, and debt and recover to a normal economic environment. The outcome can be observed in the current economic recovery that started in early 2002, and the recovering phase has continued for more than four years now to 2006. The corporate sector, the household sector, and the overseas sector have all recovered in a balanced manner, which secured the base of stable economic recovery. Economic recovery first appeared in the improvement in companies' profitability by restoring efficiency through tough restructuring efforts. However, the outcome of companies' favorable performance gradually spread to household sector, increasing consumption with an improvement in employment/wage environments.

This White Paper overviews the changes in economic activities, both from viewpoints of the corporate sector and the household sector, in order to clarify the reality of this prolonged economic recovery. As the current economic recovery, which became a reality under a unique environment of deflation, has different aspects from ordinary ones, multiple approaches will be effective. In addition to an approach from a cyclical factor of economic recovery, that from a long-term perspective of structural adjustment will be significant in discussing the future orientation of the Japanese economy.

Based on the above-mentioned awareness of the issues, this White Paper analyzes the trends of the Japanese economy by combining three chapters.

Chapter 1 mainly analyzes the present situation of the Japanese economy from various viewpoints in a comprehensive manner. Analyses are made on factors that helped to prolong the current economic recovery, the background that realized economic recovery under deflationary pressure, and the trends of financial policies while deflationary circumstances are easing. Analyses from mid-and-long term viewpoints are also made, as necessary. Financial/Asset markets that are recovering with the normalization of the real economy are also analyzed.

Chapter 2 analyzes the trends in the current economic recovery from a more microscopic perspective by looking at the structural adjustment from the companies' side, and evaluates the structural reform. The mechanism of structural adjustment, which resolved three excesses and turned the economy back to normal, is explained based on companies' rational behavioral principle. Analyses are also made on how so-called "Japanese-style management" has been maintained in the process of economic growth, and how it can be developed in the future.

Chapter 3 verifies how the outcome of structural adjustment on the companies' side has appeared on the household side. The outcome of structural adjustment first brought diversification of employment and severe employment conditions for younger people in terms of household. However, as the outcome of economic recovery spread to household, promising signs, such as an increase in stable employment, came to be observed. Enhancement of human abilities, aiming for qualitative capacity building of workers, is effective, so that household finance is to further enjoy the outcome of economic recovery. For that purpose, such measures as to improve vocational education are expected to be taken. Some worry about the expansion of economic disparity in the household sector with progress of economic recovery. We should note that available statistical data on a long-term expansion of income disparity is strongly affected by demographic changes, such as rapid aging of the population. However, the present severe employment conditions for younger people, including the phenomena of increasing NEET and part-time workers, is highly likely to expand the disparity in the future, and is one of the key policy issues to be addressed, such as by implementing a proactive employment policy.

Column 1

The Council on Economic and Fiscal Policy (CEFP)

What is the Council on Economic and Fiscal Policy?

The Council was established in January 2001 in order to exercise the full leadership of the Prime Minister regarding economic and fiscal policy.

List of Members of the CEFP

Chairperson:	Junichiro Koizumi, Prime Minister
Member:	Shinzo Abe, Chief Cabinet Secretary
Member:	Kaoru Yosano, Minister of State for Economic and Fiscal Policy
Member:	Heizo Takenaka, Minister of Internal Affairs and Communications
Member:	Sadakazu Tanigaki, Minister of Finance
Member:	Toshihiro Nikai, Minister of Economy, Trade and Industry
Member:	Toshihiko Fukui, Governor of the Bank of Japan
Member:	Jiro Ushio, Chairman and Chief Executive of Ushio Inc.
Member:	Hiroshi Okuda, Consultant of Toyota Motor Corp.
Member:	Masaaki Honma, Professor, Faculty of Economics, Osaka University
Member:	Hiroshi Yoshikawa, Professor, Faculty of Economics, University of Tokyo

Recent Major Activities

December 2004-January 2005		Deliberation of the "Structural Reform and Medium-Term Economic and Fiscal Perspectives- FY 2004 Revision" (so-called 'Reform and Perspectives FY2004 Revision') (Cabinet Decision, January 21)
May-June 2005		Deliberations of the "Basic Policies for Economic and Fiscal Management Policy and Structural Reform 2005" (so-called 'Basic Policies 2005') (Cabinet Decision, June 21)
August 2005		the "Basic Principles of the FY2006 Budget" (Compiled by Advisors, August 10) Deliberation of the "Guidelines for the Estimate Budget Request" (Cabinet Agreement, August 11)
February-November 2005		Deliberation of the Reform of the Total Amount of Personnel Costs for public employees (Compiled by Advisors, November 14)
February-November 2005		Deliberation of the Reform of Policy-based Finance (Compiled by Advisors, November 29)
March-November 2005		Deliberation of the Reform of Government Assets and Debt (Compiled by Advisors, November 29)
November-December 2005		Deliberation of the "Guidelines for Formulation of the FY2006 Budget" (Cabinet Decision, December 6)
November 2005-January 2006		Deliberation of the "Structural Reform and Medium-Term Economic and Fiscal Perspectives - FY 2005 Revision" (so-called 'Reform and Perspectives FY 2005 Revision') (Cabinet Decision, January 20)
February 2005 -		Deliberation of the "Integrated Reform of Expenditures and Revenues" (Interim report compiled by Advisors, April 7 2006)
December 2005-May 2006		Deliberation of the "Strategy in the Globalizing Economy" (Compiled by Advisors, May 18)
May-July 2006		Deliberation of the "Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2006" (so-called 'Basic Policies 2006') (Cabinet Decision, July 7)

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