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Revised Economic Forecast for Fiscal 2007-2008
(Subsequent to Release of 2nd Preliminary QE of GDP for April-June)

September 11, 2007

Forecast revised downwards to take account of recent downturn

The Institute has revised its last economic forecast (published on August 14, subsequent to the release of the 1st preliminary QE), to take account of two factors:
(i) the downward revision of actual GDP figures for the April-June quarter of 2007, published on September 10 (level of real GDP revised downwards by 0.5 points), which chiefly reflects the fall in capital investment recorded in the Quarterly Report on Financial Statements Statistics of Corporations by Industry (particularly in non-manufacturing industry and among small and medium enterprises), and (ii) expectations that the negative impact of the fall in share prices and rise in the value of the yen since August 2007 triggered by the sub-prime mortgage lenders crisis in the United States will begin to emerge in the near future. Although the effects of a stronger yen will be limited in the short term, the negative impact of the fall in share prices on consumer spending and capital investment is likely to grow to some extent.
Specifically, we have revised our estimate of real GDP growth downwards by 0.5 points (from 2.2% to 1.7%) for fiscal 2007 and by 0.1 point (from 2.0% to 1.9%) for fiscal 2008.

However, given the continued strength of exports to newly developing countries and resource-producing countries, the low level of inventory ratios in all sectors of industry except IT devices, and the continued strength of business results in the corporate sector, among other factors, it would appear that the economic trend is holding steady. The latest movements of two economic indicators also suggest that real GDP growth is likely to turn positive in the July-September quarter: (i) From August onwards, the index of manufacturing and industrial production forecast is expected to see a sharp upturn. Incidentally, if the index forecast for the August-September period is taken into account, the industrial production index for the July-September quarter is set to see a sharp rise of 4.1% on the previous quarter.
(ii) The Bank of Japan's Tankan Short-term Economic Survey and a survey by the Development Bank of Japan both suggest that capital investment will rise in fiscal 2007. It is therefore highly likely that the fall recorded in the April-June quarter is a transitory downturn and that capital investment will begin to rise again in the near future. Indeed, shipments of capital goods were at a high level during July 2007 (excluding transportation machinery), 4.0% up on the average for the April-June quarter.

Outlook: The economy is set to remain sluggish in spite of a gentle recovery

Looking ahead, three factors suggest that the quarterly pace of economic growth will see a gentle recovery up to and into the spring of 2008:
(i) the recovery of production in the IT devices sector following the completion of inventory adjustments,
(ii) the beginnings of a recovery in capital investment in non-manufacturing industry, and
(iii) the positive impact of the rise in lump sum retirement benefit payments to the dankai generation of baby boomers.

However, the following three factors will tend to act as a brake, and it is likely that the pace of growth will not increase to the point of showing a clear acceleration:
(i) the slow pace of recovery of the US economy, owing largely to the continued adjustments in the housing market and the resulting attenuation of the asset effect,
(ii) the slow recovery of business performance among small and medium enterprises, owing both to the rise in the prices of raw materials and to price competition, and
(iii) the stagnation of wages and the rise in the various burdens on household finances, which will continue to curb spending in the household sector (especially among working households).

Although the gentle economic recovery scenario will remain in place some way into fiscal 2008, two factors are likely to bring a growing mood of adjustment in the second half of the fiscal year:
(i) a fall in the economic pulling power of overseas demand as demand for investment from China slows from about the time of the Beijing Olympics, and
(ii) a tendency to hold back on capital investment in Japan as the rate of improvement in capital investment efficiency slows.

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

Tel: 03-3288-4524

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