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News Release

Trends in R&D Investment
- a Pillar of the Japanese Economy

August 12, 2005

Overview

Having seen a temporary slump in the 1990s, Japan's investment in research & development began to rise once more in fiscal 2000. Estimates of the boost to the economic growth rate provided by R&D investment, based on the growth of R&D investment, suggest that the boost to real GDP per unit of research & development stock is increasing. A factorial analysis of the economic growth rate based on the results of these estimates suggests that, since 1990, R&D stock has been the single largest contributing factor and has been driving Japan's economic growth.

One reason that R&D investment has boosted the economic growth rate is that Japanese companies have steadily expanded their investment in R&D with relatively little regard for profit trends.

Projections of Japan's economic growth on the basis of three scenarios for R&D investment growth give the following results.
(i) If real R&D investment continues to grow at its current pace of around 6.2% (average rate for fiscal 1980~2003), the economic growth rate is likely to be just under 2%, higher than the average recorded since the bursting of the "bubble economy".
(ii) If R&D investment growth accelerates (to 10.9%, the average rate for fiscal 1980-1990), the economic growth rate is likely to be just under 3%.
(iii) If R&D investment growth slumps (to 2.2%, the average rate for fiscal 1991-2003), the economic growth rate is likely to fall to a level lower even than the average recorded since the bursting of the bubble.

In Scenario (i), Japan can expect to see steady economic growth, but there is no guarantee that this scenario will unfold to plan and if companies start to pay greater regard to short-term profitability, it is still possible that R&D investment will slump as in Scenario (iii). If Japan is to avoid its economic growth rate falling to a level below the average recorded since the bursting of the "bubble economy", as in Scenario (iii), and aim for Scenario (ii), which would allow faster economic growth, greater policy support will be required.

As regards tax incentives for R&D, if the measure allowing companies to add 2 percentage points to their total experimental and research expenses is discontinued at the end of fiscal 2005, it is thought that post-tax profits could fall by up to ¥230 billion. If companies aim to keep their post-tax profits at their level prior to the discontinuation of this measure by cutting back on R&D investment, investment in R&D will have to be cut by approximately ¥420 billion (3.6% of total R&D investment). Given this negative impact, there is some doubt as to the wisdom of scaling back support measures and it would seem preferable to continue with the current system of incentives.

For more information on the content of this report, please contact: Ikuo Masuda the Japan Research Institute, Limited.

Tel: 3288-5017
E-mail:masuda.ikuo@jri.co.jp

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