Japan's gross domestic product (GDP) for the fourth quarter of calendar 1997 fell 0.2% over the previous period after adjustment for price fluctuations, or at an annualized rate of -0.7%, according to preliminary figures released by the Economic Planning Agency (EPA).

A dramatic fall in personal comsumption, a psychological response to a string of failures in the financial industry, including big names such as Yamaichi Securities Co., and a growing tendency to hold back on capital spending, partly in response to the economic crisis in Asia, are main causes of the poor economic performance. As a result, GDP growth for 1997 is expected to reach only 0.9% in real terms.

Rickety Financial System
The main reason for negative growth in the fourth quarter of 1997 was a drop in spending. Personal consumption, which accounts for 60% of GDP, contracted 0.9% from the previous quarter, significantly dragging down overall growth. In the second quarter, immediately after the 2-point hike in the consumption tax to 5%, spending plunged 5.3%. The third quarter saw some recovery, as growth hit 1.7%. But with prevailing uncertainties about the soundness of the financial system, consumers became more cautious, and consumption dropped anew in the last quarter.

Although investment in plants and equipment--another key component of domestic demand--rose 0.6%, its second successive quarter of growth, the trend line is clearly sagging: More companies are cutting back on investment amid shrinking consumption and corporate revenues. Private housing investment was down 4.2%, the fourth consecutive quarterly decline.

As a result, real annual growth for 1997 was 0.9%, the first time since 1994 that growth failed to reach 1%. The growth rate was 1% in 1992, 0.3% in 1993, 0.9% in 1994, 1.5% in 1995, and 3.9% in 1996.

Among the Group of Seven (G-7) countries, Japan marked the highest growth in 1996. But with the United States and Canada boasting 3.8%, Britain 3.2%, France 2.4%, Germany 2.2.% and Italy 1.5%, however, Japan fell to the bottom of the rankings in 1997.

Noting signs of increased individual spending and housing investment, the EPA is expecting some improvement in the first quarter of 1998. Effects of recent government initiatives, including a 2 trillion yen income tax cut and a string of measures to restructure the financial system, are beginning to kick in. The government is planning additional stimulus packages in order to sustain continued domestic demand beyond April.

	1996		1997
	III	IV	I	II	III	IV
Real GDP	-0.4	1.1	2.0	-2.8	0.8	-0.2
Personal consumption	0.2	0.9	4.0	-5.3	1.7	-0.9
Private housing investment	1.0	2.5	-5.1	-10.6	-10.9	-4.2
Private plant and equipment investment	2.9	2.9	1.2	-1.7	1.1	0.6
Increase in private inventories	-34.5	-70.0	-86.9	4725.0	8.9	-39.5
Government consumption	0.2	1.0	-0.9	-0.9	0.7	1.4
Government investment	-12.6	-5.2	-3.2	0.5	1.2	-1.8
Increase in public inventories	-64.0	-37.5	309.0	-29.5	-65.5	193.7
Net exports of goods and services	562.4	110.2	18.3	127.5	-4.1	32.8
Exports of goods and services	2.4	4.8	1.4	5.8	-1.5	3.1
Imports of goods and services	0.1	2.0	0.5	-2.3	-1.1	-1.3

Ministry of Foreign Affairs

Japan Information Network

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