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Key Points about the Japanese Economy
May 18, 2006
I. Economic Trends in Japan

The official assessment of the Japanese economy in May stated: “The economy is recovering.”

As the result of the progress of structural reform, Japanese economy has emerged from the negative
legacy of the burst of the bubble economy; the non-performing loans (NPLs) problem has been
normalized, and the profitability of the business sector has been increased. Japanese economy is on a
sustainable recovery track led by private demand, not relying on fiscal stimuli.

Japanese economy has been in an expansion phase for more than four years since the beginning of 2002.
The economic recovery supported by the domestic private demand is expected to continue, as resiliency
in the corporate sector is extending into the household sector.

The employment situation is improving on a broader basis. Unemployment rate, which had once reached
to 5.5% in January 2003, has improved down to lower 4% level, and the wages have been increasing
moderately.
Progress of NPLs Disposal
(Major Banks)
(trillion yen)
(%)
60
10
8.4 8.1
ratio of NPLs
(right scale)
50
7.2
8
6.5
amount of NPLs
40
5.2
6
(left scale)
4.7
30 26.8 23.9
20.2
2.9
4
17.5
20
13.6 12.1
2.4
7.4 6.1 2
10
0
0
02.3 9 03.3 9 04.3 9 05.3 9
（year.month）
Source: Financial Services Agency
Profit and Capital Investment
（billion yen）
12,000
14,000
Employment Situation
(%)
6.0
(ratio)
1.2
1.01(06/3)
11,000
12,000
10,000
10,000
5.5
1.0
5.0
0.8
4.5
0.6
9,000
8,000
4.0
8,000
6,000
3.5
00 01 02 03 04 05
4.1%（06/3）
0.2
02
03
04
05
06(year)
Unemployment Rate
Effective Job Offers-to-Applicants Ratio
Capital Investment（left scale）
Current Profits（right scale）
Source: MOF
Note: Seasonally adjusted
0.4
*Seasonally-adjusted figures.
Source: MIAC, MHLW
II. Recent Major Topics

Yen has rapidly been appreciating since late April, and it reached 109yen/$ in the middle of May, highest
in the last eight months.

The Nikkei stock average, which had once recovered 17,000 yen level in the end of March, started to
decline from the middle of May and has returned to lower 16,000 yen level.

According to the Balance of Payments Statistics of 2005FY (Preliminary), released in May 15 th, while
the trade surplus decreased for the first time in four years, the income continued to expand and it
exceeded the amount of the trade surplus for the first time in history.
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III. The Outlook of Japanese Economy

The growth rate of real GDP in FY2005 is expected to be approximately 2.7%. Japanese economy has
emerged from the weakness in export and production, and keeps recovering at a moderate pace. The
resiliency in the corporate sector is extending into the household sector, through the improvements in
employment and wages.

The growth rate of real GDP in FY2006 is expected to be 1.9%. Japanese economy is expected to
continue a moderate recovery led by private demand, with continuing growth of consumption and
business investment.
（％）
3.0
2.5
Projection
Real GDP
growth rate
2.7
2.3
Net exports
1.9
2.0
1.7
1.5
1.0
1.1
0.5
0.0
▲ 0.5
Business
Investment
Private
Consumption
2005
2006
（FY）
Others
▲ 1.0
2002
2003
2004
Source: Cabinet Office
Note 1: The components in the bar graphs are the contribution to GDP growth.
2: Public demand, private inventory and residential investment are included in "Others."
IV. Economic and Fiscal Policy
1. Efforts to overcome deflation

The annual changes of CPI have recently been positive, inflated by some specific factors related to
petroleum products. Looking overall, the Japanese economy is still in a mild deflationary phase, while
the price trend shows some improvement.

The Government and the Bank of Japan (BOJ) will act as one to defeat deflation. We will further
accelerate reforms in the areas of finance, taxation, regulation and expenditure. The Japanese economy
should gradually move toward a moderate recovery centered on private demand.

The Government says that whether the deflation has been overcome or not will be judged carefully, by
examining the price trend and its background in a comprehensive manner.

The BOJ announces that it will maintain an accommodative monetary environment ensuing from very
low interest rates as long as inflationary pressures are restrained.
2. Budget Consolidation

Since the mid-90’s, the fiscal situation in Japan has been worsening. The amount of long term debt
outstanding of Central Government in FY2005 reached 600 trillion yen and it is 118% of GDP.
Fiscal
structural reform is one of major issues.

The government aims to achieve a primary surplus in the early 2010s. Primary balance of the FY 2005
2
Budget is improving for the second consecutive years.
V. Structural Reform
1. Basic Policies for Structural Reform

The Koizumi Cabinet will continue to promote vigorously the structural reform under the policies of
“without reform there will be no growth”, “leave to the private sector what it can do”, and “leave to the
localities what they can do”.

Press ahead with financial, taxation, regulatory reform and public expenditure reforms in order to bring
out the vitality of the private sector and the motivation of regions. Overcoming deflation and revitalize
the economy.

During the concentrated consolidation period up to FY2006, the government will accelerate its efforts
for the structural reform, focusing on the following challenges: 1) to create a “small and efficient
government;” 2) to create a foundation that will allow Japan to tide over the declining birthrate, aging
population and globalization; 3) to overcome deflation and make private demand-led economic growth
more certain.
2. Accomplishments of Structural Reform

The financial system has stabilized, as the result of the Program for Financial Revival, accelerating the
disposal of non-performing loans, and advancing integrated responses by industry and finance. The
partially remaining full deposit guarantee was removed in April 2005 as planned, and the NPLs problem
of major banks was resolved.

Over 1000 regulatory reform items have been implemented, and over 800 Special Zones for Structural
Reform had been created by spring 2006.

Through the expenditure reforms, the ratio of general government expenditure to nominal GDP has been
declining. And the reform of subsidies, transfer of tax revenue resource, and reform of local allocation
tax have been implemented to complete the reform package of three issues.

Under the target to double the cumulative stock of Foreign Direct Investment (FDI) in Japan, the
Government is making various efforts in line with the "Program for the Promotion of Foreign Direct
Investment in Japan." For the past three years after 2001, the balance has increased by about 1.5 times.

The bills to privatize Japan Post were passed in October 2005. Japan Post will be privatized in October
2007.

The plan to reorganize and rationalize public corporations has been executed and out of the 163
corporations to be reformed, 136 corporations were abolished, privatized or underwent other measures.
The four Highway-Related Public Corporations were privatized in October, 2005.

There has been active revitalization and restructuring of corporations as can be seen from drastic
increase of over 20,000 new businesses emerging in the past year under the Special Regulations
Governing Minimum Capital Requirements, which reduces the capital requirement for new corporations
to 1 yen. (It was made a permanent regulation by the new corporate law, which took effect in spring
2006.)
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VI. Japan and the International Community

Japan is the second-largest economy in the world, after the U.S. We have tremendous sources of
economic strength, including technological innovation, impressive household wealth and social stability.

As a responsible member of the international community, Japan’s role should be to further invigorate its
economy.

Japan will actively continue negotiations in the World Trade Organization’s (WTO) new round. Japan
will also promote economic partnerships, including free trade agreements (FTAs), and regional ties,
through institutions such as Asia-Pacific Economic Cooperation (APEC) and the Association of
Southeast Asian Nations (ASEAN).
We will contribute to the sustainable development of the world
economy by strengthening the international financial system and carrying out assistance to developing
countries.
VII. Aging Society, Decline in Birthrates

A major challenge that will affect the Japanese economy is the aging society and the decline in
birthrates. The working-age population reached a peak in 1995 and has since been in decline. The total
population is predicted to peak in 2006 and decrease thereafter.

The aging society is one of the factors that restricts economic growth and creates financial strain for the
social security system. Comprehensive reforms will be made of social security system which will
include pension, medical care, nursing care and public assistance, etc.
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Main Economic Indicators of Japan
ANNEX
Real GDP Growth Rate
(at annual rate, %)
8
6.3
(ratio)
1.2
1.01(06/3)
5.5 5.7
6
Income and Consumption
（2000=100）
99.0
Employment Situation
(%)
6.0
5.4
5.5
1.0
5.0
0.8
109.0
Synthetic Consumption
Index (left scale)
108.0
107.0
3.2
3.1
4
2
0.8
0.4
0
4.5
4.0
-0.6
-2 -0.8
4.1%（06/3）
03
04
05
The real GDP growth rates have been
positive for four consecutive quarters.
Export and Production
（2000=100）
122.0
Index of Industrial
Production（left scale）
Export Volume Index
（right scale）
95.0
103.0
94.0
118.0
116.0
100.0
114.0
112.0
98.0
04
05
06
Unemployment rate is on a downward
trend. The effective ratio of job offers to
applicants has been rising.
Profit and Capital Investment
（billion yen）
12,000
14,000
120.0
102.0
11,000
12,000
10,000
10,000
9,000
8,000
8,000
108.0
04/1 04/7 05/1
2.7%（06/3）
2
1
0
0.5%（06/3）
-2
-3
04
05
03
06
（year）
Corporate prices have been rising due to
high oil prices. The year-on-year percent
changes of CPI have turned positive.
05
06
Source: Bank of Japan
Capital investment is increasing with the
improvement in corporate profits.
Firms' judgements on business conditions
are improving, especially in large
manufacturing enterprises.
Stock Prices (Nikkei)
(yen)
18,000
(yen/$)
124
122
120
118
116
114
112
110
108
106
104
102
100
04
Large enterprises, Manufacturing
Large enterprises, Non-Manufacturing
Medium/Small enterprises, Manufacturing
Medium/Small enterprises, Non-manufacturing
Current Profits（right scale）
Source: MOF
Note: Seasonally adjusted
Yen/Dollar Rate
Consumer Price Index
Corporate Price Index
4
03
(Forecast)
6,000
Price Indices
*CPI: general, excluding fresh food
Source: MIAC, Bank of Japan
Tankan Survey
(D.I.)
40
30
20
10
0
-10
-20
-30
-40
Capital Investment（left scale）
Export has recovered after the second
quarter of 2005. Production is recovering.
-1
Private consumption is increasing,
supported by the increase in income.
00 01 02 03 04 05
05/7 06/1
Sources: MOF, METI
Note: Seasonally adjusted; Moving averages
of past three months
(at annual rate, %)
04/1 04/7 05/1 05/7 06/1
*cash earnings per employee × number of
employed persons (non-agriculture)
Source: Cabinet Office, MHLW, MIAC
Note: Seasonally adjusted; Moving averages
of past three months
I II III IV I II III IV I II III IV I II
110.0
96.0
02
104.0
*Seasonally-adjusted figures.
Source: MIAC, MHLW
Source: Cabinet Office
104.0
0.4
Unemployment Rate
Effective Job Offers-to-Applicants Ratio
I II III IV I II III IV I II III IV
03
105.0
0.2
02
-4
96.0
0.6
-0.7
3.5
3
97.0
106.0
1.9
106.0
98.0
Real Employees'
Income*（right scale）
Depreciation
17,000
16,158（06/5/16）
16,000
109.7（06/5/16）
15,000
14,000
13,000
12,000
11,000
Appreciation
04/1
04/7
05/1
10,000
05/7
06/1
Source: Datastream
04/1
04/7
05/1
05/7
06/1
Source: Datastream
Yen has rapidly been appreciating since the
middle of April.
5
The Nikkei average, which had once
recovered to 17,000 yen level, has returned
to the lower 16,000 yen level.