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A Revised Economic Forecast for Fiscal 2004-2005

Februaly 18, 2005

October-December 2004 GDP Figures Show Negative Growth for a Third Consecutive Quarter

The October-December quarter of 2004 saw negative growth for a third consecutive quarter with real GDP down 0.1% on the previous quarter, equivalent to an annualized fall of 0.5%. (The estimates of GDP in the July-September quarter were also revised downwards.) The principal cause is that, although capital investment and government expenditure rose, consumer spending fell and net exports also made a negative contribution.

(1) Consumer spending: Consumer spending has fallen for two consecutive quarters. Although the deterioration in employment and income conditions has been halted, (i) the fall in spending due to typhoons, floods and earthquakes, (ii) the slump in sales of winter goods and services owing to the mild weather, the rise in the price of fresh foods, (iv) the deterioration in consumer confidence due to the raising of pension insurance contributions and the cutting of the fixed-rate tax reduction, and other factors have exerted a downward pressure on overall spending. It is also possible that the manifestation of the downward adjustment due to the change in samples used in the Family Income and Expenditure Survey has been on the strong side.

(2) Capital investment: If special factors* are disregarded, capital investment has risen for ten quarters in succession. However, as investment in the manufacturing sector has weakened owing to industrial production entering an adjustment phase, the rate of growth is slowing. Nevertheless, as the tendency is to underestimate capital investment at the primary quarterly estimates, it is possible that there will be a slight upward adjustment at the secondary quarterly estimates, which incorporate the Financial Statements Statistics of Corporations by Industry.
*As the Japan National Oil Corporation purchased assets from private-sector companies in the January-March quarter of 2004, capital investment in the GDP statistics has fallen.

(3) Net exports: Net exports have made a negative contribution for two consecutive quarters. This is largely because, although import growth has remained high, exports to Europe and the United States have slowed and exports to Asia have lost their economic pulling power.

If negative growth for three consecutive quarters were the only factor taken into consideration, it would be justifiable to suppose that the Japanese economy has entered a recession phase. However, given that (i) special factors such as abnormal weather conditions exerted strong downward pressure, (ii) the scale of the downturn itself is small and it is possible that figures yet to be published with revise growth upwards to "holding level", and (iii) economic indicators are not moving downward across the board, our assessment that this is a "brief adjustment phase within a medium-term recovery trend" remains unchanged.

The GDP deflator has fallen sharply (by 0.3%) as compared with the same quarter in the previous year. Although deflationary pressures are diminishing, given that the prices of fresh foods, the prices of construction materials and civil servant salaries, among other factors, are exerting upward pressure on the deflator, it would be hasty to conclude that the GDP deflator will from now on maintain a steady rise.

Outlook: Moving Into a Gentle Recovery from the Second Half of 2005

The adjustment phase that began in mid-2004 is likely to continue during the first half of 2005. Against the backdrop of (i) inventory adjustments in the electronic components & devices sector, (ii) a decline in the economic pulling power of exports to Asia, and (iii) a slowdown in consumer spending due to the increased burden on households in the shape of a rise in pension insurance contributions and the abolition of the special deduction for a spouse, etc., the economy will remain on a plateau.

However, given that (i) capital investment continues to recover at a gentle pace, (ii) the rate of the decline in public investment is expected to slow for a time, and (iii) the effect of the abnormal weather conditions which exerted downward pressure on the economy in the October-December quarter of 2004 will tail off, the economy is likely to return to gentle yet positive growth.

However, given that (i) capital investment continues to recover at a gentle pace, (ii) the rate of the decline in public investment is expected to slow for a time, and (iii) the effect of the abnormal weather conditions which exerted downward pressure on the economy in the October-December quarter of 2004 will tail off, the economy is likely to return to gentle yet positive growth.

Thereafter, however, the economic recovery is likely to proceed at a gentle pace as (i) the pace of recovery of the Chinese and US economies is likely to be slower than the rapid growth recorded in 2003-2004 and (ii) although employee wages are recovering at a gentle pace, there is still little hope of any perceived recovery in disposable incomes owing to the increased burden on households as a result of the rise in pension insurance contributions among other factors.

As compared with our previous forecast (issued on December 10), the forecast of real GDP for fiscal 2004 has been revised downwards by 0.6 percentage points and the forecast of real GDP for fiscal has been revised downwards by 0.2%. However, as these revisions incorporate the downward revisions of the past three quarters, and are also due in part to the upward revision of our forecast value of the GDP deflator the outlook is basically unchanged.

For more information on the content of this report, please contact
Hideki Matsumura / Hisashi Yamada
Economics Department

Tel: 03-3288-4524 / 03-3288-4245
E-mail:matsumura.hideki@jri.co.jp / yamada.hisashi@jri.co.jp

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