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News Release

Economic Forecast for the Kansai Region in Fiscal 2007
and Evaluation of the Export Decline Scenario

December 12, 2006

Overview

Since early 2002, the Kansai economy has been following an upward trend. The present growth phase is as long as the "Izanagi boom", but, for many, there is still little real sense of improvement. In contrast to the situation at the time of the "Izanagi boom", among the small and medium enterprises that make up the majority of companies, the ratio of enterprises that say they feel "business conditions are good" is as yet low, and the recovery has been slow to spread from the corporate sector to the household sector.

Although conditions have not yet improved to the degree experienced by large enterprises, economic recovery, as a trend, has begun among small and medium enterprises. Meanwhile, the knock-on effects of economic expansion are reaching the household sector. The balance of labor supply and demand and the employment and wages indicators are improving, and consumer spending has begun to recover.

Once consumer spending, which is not subject to fluctuation on the same scale as exports or capital investment begins to make a sizeable contribution to growth, the stability of the economy will increase. However, consumer spending is not yet so strong as to be able to shoulder the entire burden in the event of a sudden decline in the contribution to growth currently made by exports and capital investment. For this reason, exports and capital investment hold the key to the future of the economy. The trend of exports merits special attention, as it impacts on capital investment through its effects on production, capacity utilization, business profits, etc.

With the US economy expected to achieve a soft landing with growth at 2-3%, it is likely that the Kansai region's exports to the United States will slow to 1% or zero growth, but avoid a significant decline. The Kansai's exports to China are subject to far greater fluctuation than China's rate of real economic growth, but as Chinese government policy is likely to be aimed at securing a certain level of growth, even if the pace of growth slows to some extent as a result of moves to curb excessive investment, it is thought that the likelihood of exports to China slowing is small.

In fiscal 2007, exports and capital investment are likely to slow, relative to the high growth rates recorded in fiscal 2006, but a rise in consumer spending should serve to underpin the economic trend, and, although it may experience a temporary slowdown, the Kansai economy is basically set to continue on its upward path, with real economic growth at 1.9%.

By way of a risk scenario, the Institute has the estimated the impact of 10% falls in exports to China and to the United States. If exports to China were to fall by 10%, the value of shipments of manufactured goods from the Kansai would be likely to fall by -0.7%. A fall in exports to China would therefore have a greater impact on the Kansai economy than on other regions of Japan (-0.4%) or Japan as a whole (-0.5%). By contrast, if exports to the United States were to fall by 10%, the impact on the value of shipments of manufactured goods from the Kansai would be -0.8%, slightly less than the impact on shipments from regions other than the Kansai (-0.9%) or Japan as a whole (-0.9%), but greater than the impact of a fall in exports to China.

For more information on the content of this report, please contact Kiyoshi Yoshimoto , Mizuho Nishiura, the Japan Research Institute, Limited.

Tel: 06-6534-5204
E-mail:matsumura.hideki@jri.co.jp

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