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Revised Economic Forecast for Fiscal 2006-2007
(Subsequent to Release of 2nd Preliminary QE for July-September)

December 9, 2009

"Lowering of launch pad" means real growth in FY 2006 is set to be 1.8%

This revised forecast of economic growth reflects the content of the Results of the Annual Revision for FY2005 and the Retroactive Revision of GDP (expenditure series) from 1996 (released on December 1; "Annual Revision for FY2005") and the 2nd preliminary quarterly estimates (QE) for the July-September quarter (released on December 8). The major points of these two sets of statistics are as follows.

The Results of the Annual Revision for FY2005 and the Retroactive Revision of GDP (expenditure series) from 1996 newly reflects the content of a range of annually published statistics, including the Census of Manufactures and the Annual Report on Financial Statements Statistics of Corporations by Industry, and the method used to estimate the distribution inventory deflator has been modified. As a result, the real growth rate for fiscal 2005 is +2.4%, representing a downward revision of 0.9 points (centering on domestic private-sector demand) as compared with the figure of +3.3% that would be obtained with the statistical approach used to date.
Similarly, the nominal growth rate has been revised downwards from +1.8% to +1.0%.

The 2nd preliminary QE for the July-September quarter, published subsequent to the release of the Results of the Annual Revision for FY2005 and the Retroactive Revision of GDP (expenditure series) from 1996 and the Quarterly Report on Financial Statements Statistics of Corporations by Industry for July-September, and revised editions of other basic statistics such as the Current Survey of Commerce, put the real growth rate at +0.2% on the previous quarter (equivalent to an annualized rate of +0.8%; year-on-year change: +1.6%), a figure that represents a downward revision of the figure of +0.5% estimated at the time of the 1st preliminary QE (equivalent to an annualized rate of +2.0%; year-on-year change: +2.7%). With the exception of public sector demand, the 2nd preliminary QE revise growth downwards for all items.
Real GDP for the April-June quarter is revised downwards to +0.3% on the previous quarter (equivalent to an annualized rate of +1.1%; year-on-year change: +2.1%) as compared with the figure of +0.4% on the previous quarter in the 1st preliminary QE (equivalent to an annualized rate of +1.5%; year-on-year change: +2.6%).

Moreover, nominal GDP growth remained unchanged in both the April-June and July-September quarters, at +1.0% year-on-year, confirming an economic recovery of which there is little real sense in the market.
If change on the previous quarter continues at the same rate in October-December and thereafter, real growth in fiscal will be 0.6 points lower than the trend to date.
Consequently, this forecast revises the real growth rate for fiscal 2006 downwards by 0.5 points (from +2.3% to +1.8%) and the real growth rate for fiscal 2007 downwards by 0.2 points (from +2.5% to +2.3%) as compared with the previous forecast (issued on November 15, after the publication of the 1st preliminary QE).
However, it should be understood that this revision does not so much represent a change in the Institute's basic view of the future trend of the economy as reflect a revision of the past statistics that serve as the basis for forecasts - a "lowering of the launch pad".
Incidentally, a revision of the latent growth forecast to reflect this revision in past statistics would reduce the rate for the 2000s by 0.2-0.3 points.

*1: It goes without saying that constant efforts are required to improve the accuracy of preliminary QE of GDP, but, with regard to consumer spending in particular, a radical overhaul, including a review of the method by which basic statistics are gathered (or the implementation of a new survey), would be desirable. Action should also be taken, in the near future, with regard to capital investment, including the use of order statistics prior to the reflection of the Quarterly Report on Financial Statements Statistics of Corporations by Industry.

The Institute's revised scenario for the future trend of the domestic economy is as follows.
The second half of fiscal 2006 will see a continued, gradual deceleration, owing chiefly to the deceleration of overseas economies beginning to make itself felt in earnest, an adjustment in production speed in the IT sector, centering on electronic components and devices and a tailing-off of the surge in capital investment due to large-scale projects.

Nevertheless, two factors suggest that, in contrast to the situation at the time of the collapse of the IT bubble or during the "plateau" phase of 2004, the Japanese economy retains a considerable ability to absorb shocks, and, consequently, it is unlikely that the recovery trend itself will be disrupted:

(i) The shipments-inventory balance in non-IT sectors is improving.
Even if an adjustment takes place in the IT sector, the non-IT sectors, such as automobiles and general machinery, will underpin demand and it is likely that a major production adjustment across all sectors of industry can be avoided.

(ii)The corporate sector is resolving pressures for structural adjustment and is likely to enjoy plentiful money stocks.
With management concerns in the corporate sector shifting from the "adjustment of excessive levels of employment, capital equipment and debt" to "active business development with a view to survival against global competition", the corporate sector is set to maintain its positive stance on capital investment and employment.

Under these conditions, although continuing to be affected by the slow growth of wages and the increased burden on the household sector, and remaining prone to fluctuation caused by weather factors and the trend of share prices, consumer spending is likely to avoid total collapse thanks to improving employment conditions, among other factors.

In summary, even if the Japanese economy decelerates in the short term, it is likely to hold steady overall.
If anything, assuming that the US economy achieves a "soft landing", it is likely that, from the spring of 2007, the positive effects of the recovery of the US economy and the boost to corporate profits provided by the mass retirement of dankai generation baby boomers (through increased consumer spending on the strength of a rise in the payment of lump sum retirement benefits and through a fall in personnel costs) will have an increasingly positive effect on the domestic economy. Under these conditions, it is highly likely that the growth rate will accelerate once more.

*2: We believe the main risk factors in the above scenario include both factors tending to lead to a downturn, such as the US economy failing to make a soft landing, and increased geopolitical risks leading to a sharp rise in natural resource prices, and factors tending to lead to a "short-term upturn", such as a rise in the volume of inefficient capital investment in conjunction with the recovery of overseas economies and against the background of a continued ultra-loose monetary policy and a reduction in corporate taxation (although both of these would eventually give rise to severe pressure for stock adjustments).

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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