Revised Preliminary Figures for July-September and Fiscal 2003 Final Figures Revise Household Sector Expenditure Downwards

The revised GDP statistics released on December 8 substantially revise figures for GDP up to the July-September quarter of 2004, but the assessment of the current state of the economy is unchanged. Owing to production adjustments in the electronic devices sector and a slowing of export growth, the economy has lost some momentum but consumer spending and capital investment are holding firm and, at present, the perception is that the economy is going through a "temporary adjustment phase within a recovery trend" of the kind experienced in the second half of fiscal 2002.

(1) Fiscal 2003 Final Figures Adjust Nominal GDP Downwards

On the basis of detailed estimates of the supply situation, the final figures for fiscal 2003 revise the figures for household sector spending downwards, and the figures for corporate and government sector spending upwards. Due to the significant downward adjustment of figures for consumer spending, the level of nominal GDP in recent months has been adjusted downwards by 0.2percentage points. The changes to the parameters of weighting to reflect supply-side estimates mean that the adjustments to consumer spending and capital investment can be interpreted as having brought the estimates, which until now have been too high or too low, closer to the movements of the real economy.

(2) The Introduction of Chain-Linked Deflators

As the Paasche effect of the deflators (whereby the downward bias increases over time) has fallen off owing to the recent switch to a formula of conversion to real terms on the basis of current weight, the deflators have been adjusted upwards and, in conjunction with this adjustment, real values have been adjusted downwards. The reduction in the rate of fall of the capital investment and consumer spending deflators has been particularly large.

While capital investment fell in the January-March quarter of 2004, public investment saw a sharp rise. This was due to the Japan National Oil Corporation purchasing assets from private-sector subsidiaries. Accordingly, the pattern of rising capital investment and falling public investment is unchanged.

Outlook: Temporary Adjustment Phase to Continue Into First Half of 2005

The basic scenario for the future remains unchanged. However, the introduction of the chain deflators has prompted a downward adjustment of the real GDP forecast throughout the forecast period.

The present adjustment phase is likely to continue through the second half of fiscal 2004. Against the backdrop of (i) a decline in the economic pulling power of exports, inventory adjustments in the electronic devices sector, and (ii) 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 continue to decelerate. The powerful typhoons that came ashore in October and the Niigata-Chuetsu Earthquake may have exerted a downward pressure on consumer spending and industrial output. However, the downward pressure on the economy has not been particularly strong and as capital investment is expected to see a gentle recovery, the economy is likely to see a return to gentle yet positive growth. It is thought that the economy will basically remain firm and the present situation is regarded as a temporary adjustment phase within a medium-term recovery trend.

Looking ahead to fiscal 2005, the mood of adjustment is likely to continue for a time but the signs of recovery are likely to grow stronger from the second half of the fiscal year. With production adjustments set to continue, especially in the electronic devices sector and capital investment in related areas of the economy set to weaken after a given time lag, and with the economic pulling power of consumer spending set to weaken as a result of the increased household burden, the adjustment phase is likely to continue for some time after the beginning of fiscal 2005.

However, given that (i) exports are likely to see continued growth owing to the continued growth of the Chinese economy, (ii) the pressure for adjustment in the electronic devices sector is limited, and, thanks to progress with restructuring programs, etc., the corporate sector is now on a firmer footing, and (iii) the deterioration of income and employment conditions has bottomed out, the economy is likely to avoid a serious slump. From the second half of the fiscal year, the economy is likely to show clearer signs of a recovery led by the corporate sector.

As compared with our previous forecast (issued on November 16), the forecast level of real GDP for fiscal 2004 has been revised downwards by 0.9 percentage points (from 3.0% to 2.1%) while the forecast for fiscal 2005 has been revised downwards by 0.5 percentage points (from 1.9% to 1.4%). The forecast for nominal GDP for fiscal 2005 is basically unchanged. (Note, however that the forecast for fiscal 2004 has undergone a slight downward revision of 0.1 percentage points owing to the change in the level of real values, among other factors.)

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

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

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