1. Continued Positive Growth in the January-March Quarter

The GDP statistics for the January-March quarter of 2004 are likely to show an increase of 0.8% in real economic growth on the previous quarter (annualized rate +3.2%), positive growth for a fifth consecutive quarter. Although a slowdown was inevitable after the high rate of growth recorded in the October-December quarter of 2003, a number of factors have helped to buoy the economy, including (i) continued export growth amidst a strengthening of the global trend towards economic recovery, (ii) consumer spending holding steady against the backdrop of a recovery in consumer confidence and (iii) the continued recovery of capital investment, especially in the manufacturing sector. These figures boil down to an estimated growth rate of 3.0% for fiscal 2003.

Movement of the Major Elements of Demand

(1) Consumer Spending

With the deterioration in employment and income conditions slowing and the improvement in consumer confidence becoming more evident, consumer spending has continued to rise as (i) demand for relatively high-priced products such as cars has begun to grow and (ii) spending on services has recovered, among other factors. The much-feared impact of BSE, avian influenza and the unusually mild weather appears to have been relatively slight. However, given that the figures for consumption expenditure in the Family Income and Expenditure Survey have been boosted significantly by changes in the survey sample, among other factors, it is possible that the figures are higher than the real level of consumer spending.

(2) Housing Investment

Although investment in detached houses has continued to weaken, construction starts on housing for rent and condominiums in the Tokyo area has recovered and the overall housing investment figures are likely to show an increase, if only slight, for the first time in two quarters.

(3) Capital Investment

In spite of the sharp growth registered in the October-December quarter, capital investment is thought to have recorded quarter-on-quarter growth of 1.8% (annualized rate +7.2%). Thanks to the recovery of production and capacity utilization, the will to invest has strengthened, particularly in the manufacturing sector, and investment in software, which has been sluggish, also shows signs of recovery.

(4) Government Expenditure

Although civil servant salaries have continued to weaken, government consumption has continued to grow owing to the expansion of spending on medical care and nursing. Public investment has declined for the eighth quarter in succession, owing to continued austerity, particularly among local government bodies.

(5) Exports

With the recovery of the global economy gathering momentum, exports are enjoying continued rapid growth. Among exports to Asia in particular, there has been substantial growth of exports to satisfy internal demand such as chemical products and general machinery as well as exports of production goods such as electronic devices and audio equipment components. Exports to the United States have also begun to rise, led by special industrial machinery (for capital investment purposes) and digital consumer electronics.

(6) Imports

In addition to the temporary factor of a rise in airplane-related imports from the United States, imports of cars from Europe have risen, in reflection of the recovery of consumer spending, and import figures have continued to rise at a gentle pace.

2. Strong Recovery Trend Likely to Continue for the Time Being

Given that the tide of economic recovery that started to rise in the manufacturing sector is starting to reach the non-manufacturing sector and the household sector, it is likely that the Japanese will to continue to recover for the time being. As production plans for April and May are extremely bold, it is likely that growth will accelerate once more in the April-June quarter. Notwithstanding negative factors such as belt-tightening in the Chinese economy and the increased burden on household finances following systemic changes, the continued recovery of the European and US economies and the growing momentum of domestic private demand mean that the recovery is basically likely to continue in the second half of fiscal 2004, although at a slower pace.

For more information on the content of this report, please contact
Hideki Matsumura
Economics Department, Economic Research Center, Domestic Economy Cluster

Tel: 03-3288-4524
E-mail：matsumura.hideki@jri.co.jp

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