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A Revised Economic Forecast for Fiscal 2005-2006
(Subsequent to Publication of Secondary QE for January-March)

June 17, 2005

Growth Unlikely to Accelerate

These revised growth forecasts reflect the content of the secondary quarterly estimates for January-March 2005, released on June 13. They also assume that the cut in the fixed-rate income tax reduction, due to take effect in January 2006, will be implemented on schedule and explicitly take account of its effects in the growth pattern forecast for early 2006 onwards.

Consequently, the forecasts of growth for fiscal 2005 and fiscal 2006 have been adjusted downwards, respectively by 0.1 points and 0.3 points as compared with our previous forecasts, published on May 20 following the release of the primary quarterly estimates.

A detailed version of these forecasts will be published in early July.

Looking to the future, the steady improvement in the financial position of Japanese companies suggests that the downside risk to the economy has declined. Against a backdrop of expanding capital investment and improving employment conditions, the fundamental solidity of the economy will increase.

However, the following factors are likely to prevent any acceleration of economic growth:

(i) With overseas economies still decelerating, the slowdown in Japan's exports is set to continue for the foreseeable future. (ii) Given the low recovery potential of wages and the forthcoming increase in the various burdens on the household sector*, consumer spending is likely to see little growth. (iii) As raising sales prices will take some time, the continued high level of resource prices is likely to exert downward pressure on corporate profitability.

*Note: In the household sector, the burden of personal taxation and social security is already increasing at a steady pace. To date, this burden has had a limited impact on spending but, if the cut in the fixed-rate income tax reduction planned for January 2006 is implemented on schedule, it will rise to more than ¥1 trillion a year, a level at which its impact on spending can no longer be disregarded. Incidentally, if the fixed-rate tax reduction were to be cut by half in January 2006 and abolished altogether in January 2007, the downward pressure on economic growth would be of the order of 0.1% in fiscal 2005 and 0.3% in fiscal 2006.

Real economic growth is therefore likely to be slower in fiscal 2005 than in fiscal 2003-2004, falling to +1.1%.

Looking ahead to fiscal 2006, on the assumption of a recovery in export growth as the adjustment in the US economy comes to an end, the real economic growth rate is set to rise to +1.5%. However, the cumulative growth of the household burden means that it is likely to see very little acceleration.

For more information on the content of this report, please contact Makoto Ishikawa the Japan Research Institute, Limited.

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

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