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A Revised Economic Forecast for Fiscal 2004-2005

March 16, 2005

Outlook: A Gentle Recovery from Mid-2005

The forecast has been revised to reflect the secondary quarterly estimates for October-December 2004, released on March 14, but the basic outlook is unchanged. Reflecting a 0.2% upward adjustment of the level of real GDP for the October-December 2004 quarter, the forecasts for fiscal 2004 and for fiscal 2005 have both been adjusted upwards by 0.1 percentage points as compared with our previous forecast (released on February 18).

In the first half of 2005, notwithstanding signs of an incipient recovery, the economy is likely to remain on a plateau 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. 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.

From around mid-2005, the signs of recovery are likely to become stronger. In other words, with (i) industrial production beginning to rise once more as inventory adjustments in the electronic components & devices sector are completed, (ii) exports recovering as the European and US economies hold firm and the Asian economies continue to grow, and (iii) the growth of capital investment accelerating as production and exports recover, the economy is likely to show clearer signs of a recovery led by the corporate sector.

Thereafter, however, the pace of economic recovery is likely to be gentle 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.

For more information on the content of this report, please contact: Hideki Matsumura,Hisashi Yamada,Yoshihito Sato the Japan Research Institute, Limited.

Tel: 03-3288-5360
E-mail:sato.yoshihito@jri.co.jp

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