1. Growth Rate Recovers Slightly in July-September Quarter

The GDP statistics for the July-September quarter of 2004 are likely to show an increase of 0.7% in real economic growth on the previous quarter (annualized rate +2.8%), positive growth for a sixth consecutive quarter. The economy has clearly slowed since the high rate of growth recorded in the second half of fiscal 2003, but largely owing to the continued growth of consumer spending and capital investment, there has been a slight upturn as compared with the April-June quarter.

Movements of the Major Elements of Demand

(1) Consumer Spending

With employees' remuneration for the most part having bottomed out and consumer confidence recovering, the figures are likely to show that consumer spending has basically remained firm. Sales of digital consumer electronics and demand relating to the heat wave were a strong positive factor in July, but fewer opportunities to go out in August and September owing to the Olympic Games and the lingering summer heat, and poor results from the autumn goods sales offensive, had a negative impact, and the overall rise has been small.

(2) Housing Investment

Housing investment figures are likely to be up for a third consecutive quarter. Although the pulling power of housing for sale has declined, construction starts on own homes have shown signs of what is thought to be a demand rush ahead of the forthcoming rise in interest rates and rose sharply in July and August.

(3) Capital Investment

Figures for capital investment are likely to show growth for a fourth consecutive quarter as well as a slight increase in the pace of growth. The recovery of production and capacity utilization has made companies more willing to invest especially in the manufacturing sector and construction is rising not only in the manufacturing sector, in the form of factory building, but also in the non-manufacturing sector, centering on the building of distribution facilities.

(4) Government Expenditure

With civil servant salaries now falling more slowly and medical care and nursing costs rising, government consumption continues to rise. The figures are likely to show that the decline in public investment has slowed although the overall downward trend has continued, especially in provincial regions.

(5) Exports

The figures are likely to show that exports have risen for an eleventh consecutive quarter, but that the rate of growth is slowing. Exports to Asia have continued to grow steadily, and the slowdown is largely due to a weakening of exports of automobiles to the United States and ships to the EU.

(6) Imports

Internal demand has begun to grow once more and the figures are likely to show a rise in imports of goods from Asia together with a rise in service imports reflecting the growth of overseas travel.

(7) The Deflator

Against the background of (i) a rise in construction material prices, (ii) a rise in goods on hand prices (iii) a slowdown in the rise of the price of crude oil and (iv) a bottoming out of civil servant salaries, the figures are likely to show that the downward trend of the deflator has slowed.

2. Economy May Slow Further but is Likely to Avoid Slipping Into Recession

Looking ahead to the second half of fiscal 2004, the downward trend of exports and capital investment, which have been the powerhouses until now, suggests that the deceleration of the economy is likely to become still more apparent.

However, given that (i) exports to Asia are likely to remain firm thanks to the continued growth of the Chinese economy, (ii) as may be seen from the bottoming out of income conditions and recovery of consumer confidence, the conditions facing the household sector are by no means bad and (iii) in the corporate sector, too, materials, automobiles, etc. are doing well, the Japanese economy is likely avoid a slowdown so severe as to cause it to slip into recession.

For more information on the content of this report, please contact
Hideki Matsumura
Economics Department

Tel: 03-3288-4245
E-mail：matsumura.hideki@jri.co.jp

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