1. Relatively High Rate of Growth Sustained in April-June Quarter

The GDP statistics for the April-June quarter of 2004 are likely to show an increase of 1.2% in real economic growth on the previous quarter (annualized rate +5.1%), annualized growth in excess of 5% for a third consecutive quarter. Not only has export growth continued, but domestic demand in the form of capital investment and consumer spending, has also held firm. The sharp decline of the GDP deflator continues, but nominal GDP is expected to register positive growth for a fifth consecutive quarter.

Movement of the Major Elements of Demand

(1) Consumer Spending

Against the backdrop of the beginnings of a gentle recovery in employment and income conditions, and steady improvement in consumer confidence, consumer spending has continued to rise thanks to continued firm demand for digital consumer electronics and increased spending on eating out, leisure travel, financial services and other services, among other factors. However, given that the figures for consumption expenditure in the Family Income and Expenditure Survey have been boosted significantly by changes in the survey sample, among other factors, it is possible that the figures are higher than the real level of consumer spending. Moreover, there are grounds for concern as consumption spending on both the supply and the demand side fell sharply in June, and the economic pulling power of digital consumer electronics appears to be fading.

(2) Housing Investment

Although construction starts on housing for rent and condominiums in the Tokyo area have risen, the downward trend of investment in detached houses means that the overall housing investment figures are likely to show a slight fall.

(3) Capital Investment

The figures are likely to show a quarter-on-quarter annualized growth rate of 15.2%, the second straight two-digit rise. Thanks to the recovery of production and capacity utilization, the will to invest has strengthened, particularly in the manufacturing sector, and investment in software, which has been sluggish, also shows signs of recovery.

(4) Government Expenditure

Although civil servant salaries have continued to weaken, government consumption has continued to grow owing to the expansion of spending on medical care and nursing. Public investment is thought to have declined for the ninth quarter in succession, owing to continued austerity, particularly among local government bodies.

(5) Exports

Owing to the continued recovery of the global economy, export figures are likely to show two-digit annualized growth for a fourth consecutive quarter. Among exports to Asia in particular, there has been growth of exports to satisfy internal demand such as general machinery as well as exports of production goods such as electronic devices and audio equipment components. Exports to the United States and Europe have also been rising in reflection of the economic recovery.

(6) Imports

Reflecting the recovery of domestic demand, the figures are likely to show import growth for the fourth consecutive quarter. However, in spite of positive factors such as the recovery in overseas leisure travel, the rate of growth is likely to have slowed as compared with the past three quarters, in reaction to the substantial rise in airplane-related imports from the United States in the January-March quarter.

2. Firm Recovery Trend Likely to Continue for the Time Being

Looking ahead to the July-September quarter, although industrial output is likely to slow, capital investment plans recorded in the Bank of Japan's Short-Term Economic Survey ("Tankan") suggest that the rate of growth of capital investment is highly likely to increase, and positive economic growth is set to continue.

Despite negative factors such as the deceleration of overseas economies and the increased burden on household finances following systemic changes, the sustained rapid growth of the Chinese economy and the growing momentum of domestic private demand suggest that the recovery is basically likely to continue in the second half of fiscal 2004, although at a slower pace.

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

Tel: 03-3288-4245
E-mail：matsumura.hideki@jri.co.jp

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