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Forecast of GDP Statistics for the January-March Quarter of 2005

May 02, 2005

1. Positive Annualized Growth of 2% in the January-March Quarter

The GDP statistics for the January-March quarter of 2005 (first preliminary figures due to be published on May 17) are expected to show positive real economic growth of 0.5% on the previous quarter (annualized rate +2.0%).

Although exports, which have been the powerhouse of the Japanese economy in recent years, have begun to fall quarter-on-quarter, consumer spending and capital investment, the two major elements of domestic demand, have emerged from the stagnation into which they had fallen around the end of 2004 and are expected to contribute to positive economic growth for a second quarter. However, nominal GDP is thought to have achieved growth of only +0.2% on the same quarter last year, and, against the backdrop of the continued downward trend of the deflator, to have seen virtually zero growth quarter-on-quarter, rising by only +0.1% (equivalent to an annualized rate of +0.4%). In summary, the GDP statistics are likely to confirm that the Japanese economy is in mixed condition, with some strong and some weak sectors, now advancing and now retreating.

2. Movements of the Major Elements of Demand

(1) Consumer Spending (Real: +0.9% on Previous Quarter, +3.8% Annualized)

The figures are likely to show that consumer spending has achieved quarter-on-quarter growth for the first time in three quarters. The main reasons are that (i) employee remuneration has bottomed out, largely on the strength of winter bonus payments, (ii) the fall in temperature in early January boosted sales of winter goods, and (iii) demand for services (travel, eating out, etc.) has recovered from the impact of poor weather and natural disasters, which caused consumers to hold back on spending in the second half of 2004. Nevertheless, consumer spending is thought to have achieved only 0.6% growth on the same quarter last year and its movements have stayed within a range that can be termed "largely unchanged".

(2) Housing Investment (Real: -1.0% on Previous Quarter, -3.9% Annualized)

Housing investment is set to fall quarter-on-quarter for the first time in five quarters. Investment is weakening in reflection of the downsizing of the tax reduction on housing loans as of January, among other factors.

(3) Capital Investment (Real: +2.1% on Previous Quarter, +8.6% Annualized)

The quarterly growth rate in capital investment has increased since the October-December quarter of 2004. It is possible that companies have begun to allocate some of their cashflow, currently running at high levels, to investment in developing greater industrial sophistication. In the manufacturing sector, the drive to rebuild factories and introduce machine tools, industrial robots and metalworking equipment is gathering momentum. In the non-manufacturing sector, investment in the creation of distribution bases, etc. is likewise holding steady.

(4) Public Investment (Real: -7.1% on Previous Quarter, -25.4% Annualized)

The decline in levels of public investment has accelerated. The boost to demand afforded by the supplementary budget for fiscal 2004 introduced in February this year with a view to promoting regeneration after natural disasters is likely to manifest itself from the April-June quarter onwards.

(5) Exports (Real: -0.6% on Previous Quarter, -2.6% Annualized)

The figures are likely to show that exports have fallen quarter-on-quarter for the first time since the October-December quarter of 2001. Although shipments to the United States have been rising, largely in the area of transportation machinery, the downward trend of shipments to Asia, which account for just under 50% of total exports, has accelerated and, with local economies sluggish, shipments to the EU countries are also weakening, especially in the area of transportation machinery and electrical machinery for public sector use. The deceleration of exports to Asia is due in large part to (i) the adjustment of inventories of IT-related goods in each country and (ii) the peaking of exports of capital goods to China, reflecting a momentary pause in the direct investment boom.

(6) Imports (Real: +0.1% on Previous Quarter, +0.5% Annualized)

There are signs of a pause in the growth at a rate of around 10% per annum that imports have maintained since around 2003. However, in recent months, sharp fluctuation in the form of rapid growth and a subsequent sharp decline as a reaction, have been observed in some categories, such as aircraft. The basic trend is still one of growth against a backdrop of steady domestic private demand and the ongoing shift towards an international division of labor.

3. Forecast for Fiscal 2004

To summarize the above, the real growth rate over the full twelve months of fiscal 2004 is thought to have been 1.6%, lower than the 2.0% recorded in fiscal 2003, but slightly above the level of 1-1.5% estimated for the latent growth rate.

4. Outlook for Fiscal 2005 Onwards

Looking to the future, from the April-June quarter onwards, as adjustments in the electronic devices sector begin to tail off, capital investment continues to expand, income and employment conditions bottom out, and the decline in public investment slows for a time, the Japanese economy will gradually move off the "plateau" and take its first steps towards recovery.

However, as the US and Chinese economies are unlikely to see growth as rapid as that achieved in 2003-04, any acceleration in the recovery of Japan's economy depends on whether the mechanisms of self-sustaining recovery in domestic private sector demand function adequately.

In other words, (i) how much of the corporate sector's abundant cashflow is channeled into capital investment with a view to developing greater industrial sophistication and enhancing non-price competitiveness, (ii) whether or not the labor share bottoms out and the virtuous circle of higher employee incomes, a rise in demand from the household sector, and growth of corporate profits is established will be of even greater importance than they have been in the past.

For more information on the content of this report, please contact: Makoto Ishikawa Macroeconomic Research Center Economics Department the Japan Research Institute, Limited.

Tel: 03-3288-4263
E-mail:ishikawa.makoto@jri.co.jp

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