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Economic Recovery Enters Critical Phase

November 11, 1999

Real gross domestic product for the April-June quarter of 1999 rose 0.1% on the previous quarter (0.4% in annual terms), the second consecutive quarter of positive economic growth and evidence of continued economic improvement. Private-sector demand--particularly housing investment and personal consumption--is leading this upturn in growth. But not all signs are good: Housing investment is now showing signs of slowing; a deteriorating employment situation and falling incomes are threatening to dampen a rise in personal consumption; and the steeply rising yen has exporters worried. To lock the economy into a full-scale recovery, the government will need to resolve these concerns while maintaining the momentum of its policies.

First Two-Quarter Growth in Two Years
This second consecutive quarter of economic growth was the first since the January-March quarter of 1997, roughly two years ago, indicating that the economy may be shaking off a long period of sluggishness. April-June growth was underpinned primarily by housing investment and personal consumption.

Low interest rates and expanded tax cuts have sparked the housing market. New housing starts have increased consistently since March, with August figures up 8.4% on the same month last year. In terms of personal consumption, July department store sales dropped 2.1% on the previous month, falling a further 2.9% in August; chain-store sales also fell 5.1% in July and 4.9% in August. In the area of consumer durables, small-engine vehicles maintained their popularity; other vehicle sales are also showing signs of recovery. Computers and other products like digital cameras and DVD players also continue to sell well. Overall personal consumption, however, remains at a standstill.

The Economic Planning Agency's Monthly Economic Report for October virtually repeats its September view on the state of the economy, noting that the strength of the recovery in private-sector demand remains limited. However, points out the report, the effects of government policies are also being felt on various levels, leading to some improvement. The EPA paper remains cautious on economic prospects, focusing on the government's plan to implement a comprehensive policy package as soon as possible.

Economic Prospects Hinge on Clearing Up Causes for Concern
Whether or not the economy will move smoothly onto the recovery track hinges on a number of issues. First, in terms of factors affecting personal consumption, corporate restructuring has kept the unemployment rate at the top end of the 4% mark, with little progress made in improving employment conditions. Income levels also continue to slip, as shown by the average 0.5% per capita drop in 1998 annual salaries of private-sector white-collar workers (National Tax Administration figures). Even housing investment is beginning to flag due to a slowdown in housing manufacturer orders--an advance indicator of housing starts. Private-sector plant and capital equipment investment is not recovering as quickly as expected; figures remain below those of the previous year.

The sudden appreciation in the yen in September has also become a worrisome factor. Yen-buying seems to be based on predictions of a Japanese economic recovery, but the sudden surge in the yen will inevitably impact negatively on the economy in the form of shrinking exports, as well as a downturn in corporate profits and falling stock prices.

How the government deals with these issues will be pivotal in whether the Japanese economy is locked solidly into recovery mode. To this end, the government plans to put together a second supplementary budget for fiscal 1999 (April 1999 to March 2000) and design economic measures to boost public works investment and bring fresh health to the employment environment.

Trends in JapanEdited by Japan Echo Inc. based on domestic Japanese news sources. Articles presented here are offered for reference purposes and do not necessarily represent the policy or views of the Japanese Government.