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Japanese Economic Issues

1. Introduction of speaker and briefing status
2. Statement by the Director-General
3. Japanese future economic growth
4. Unemployment in Japan
5. Domestic demand-led growth in Japan
6. Tax revenue measures to boost the economy
7. GDP growth rate
8. Japan and Asian economies
9. Japanese economic package

1. Introduction of speaker and briefing status

   Official of the International Press Division of the Ministry of Foreign Affairs: Good evening, ladies and gentlemen. The press conference will be given by Director-General of the Coordination Bureau Takafusa Shioya of the Economic Planning Agency on Japanese Economic Issues.

2. Statement by the Director-General

   Director-General of the Coordination Bureau Takafusa Shioya of th e Economic Planning Agency: Thank you very much, ladies and gentlemen. It is my pleasure to provide a press briefing here. I am Takafusa Shioya, Director-General, Coordination Bureau, Economic Planning Agency, Government of Japan. Let me first review the recent developments of the Japanese economy. The economy of Japan was stagnate after the decline of stock prices, or "the burst of the bubble" in the early 1990s. The economy reached a trough in October 1993, and continued to recover moderately thereafter. The real growth rate of GDP in FY1995, i.e., from April 1995 to March 1996, was 2.4 percent. The growth accelerated to 2.9 percent in FY1996. However, in 1997, growth has been affected by the increase in the consumption tax from 3 percent to 5 percent from April 1997. This induced a first quarter growth to 1.4 percent on the quarter to-quarter basis, but contributing to a sharp decline in activity in the second quarter. More recently, after the second quarter of 1997, while the private consumption recovered from the negative impact of the raise in the consumption tax, the recovery was slow. Housing construction has been stagnant, partly reflecting the impact of the consumption tax. The recovery of production has been unclear. In the labor market, the growth of employment has been lowered, and the unemployment has remained at a high level by historical standards. Judging from the situation, our Government views that the recovery of the economy in now "marking time," reflecting the weaker confidence in the business firms in particular, while the economy is still on the recovery path led by the growth of private demand. Weakness of the recovery of the Japanese economy can be attribute to the structural problems, which have cast a shadow on the prospect of the Japanese economy and dampened the confidence of consumers and business. The first structural problem exists in the regulation in Japan. Excessive regulations in Japan curb the vitality of private firms and reduce the competitiveness of the Japanese economy through high-cost structure. In an era of economic globalization, companies are choosing a country to locate, considering the various factors, including taxes and regulations. There is thus concern in Japan about the hollowing out of industries, which can cause the loss of job opportunities in Japan. The second problem is that Japan, in comparison with the rest of the world, now faces an unprecedented aging of its population with decreasing numbers of children. Aging has caused the imbalances of the income distribution between the elderly people receiving a pension and the working generation paying contributions in the social security system. Assuming present conditions stay constant, aging with a decreasing number of children will be a factor in drastically deteriorating fiscal balances. At the same time, a decline in the labor force and savings rate could lower the growth potential of the Japanese economy. Thirdly, although financial institutions in Japan are trying to dispose the bad loans, stagnated real estate markets after the burst of the bubble make it difficult for them to seal off the land collateral at the moment. Therefore, fundamental settlement has not yet come in this area. In addition, after the bubble period, the Government implemented a series of economic stimulus packages from 1992 to 1995, including such measures as the expansion of public works and income tax cuts. Overall, these expenditures and tax cuts amounted to more than 60 trillion yen. While these packages supported the economic activities in the long slump after the collapse of the bubble, it has resulted in the most critical fiscal condition among the major developed economies in the world. In this context, we need to vitalize the economic activities mainly led by private sectors, rather than rely on ad hoc fiscal expansion, so that we can push the Japanese economy back on a robust recovery path. Under these circumstances, we released a new economic policy package on 18 November. Please let me explain this economic package briefly. Our primary task is obviously, to push the Japanese economy on a robust recovery path as quickly as possible. But if we take into account the above structural problems and severe fiscal condition, a new economic package should be consistent with policies for resolving the structural problems, rather than create one shot demand in the short run. It is strongly desired to push the Japanese economy back to a private demand-led, autonomous and stable growth path by enhancing the vitality and adaptability of the Japanese economy as much as possible through promoting economic structural reform toward the 21st century, as well as trying to regain confidence on the Japanese financial system from home and abroad. In this respect, the economic package includes the following main pillars. First measures are bold implementation of economic structural reform focussed on deregulation. These include reform in telecommunications. The second is activation of transaction and effective use of land. These measures are essential for disposing the bad loans as well as for stimulating business activities. These include fundamental change of regulation on total floor area ratio in commercial districts in major cities, facilitation of conversion of agricultural land into other use and promotion of acquisition of houses in suburban area. The third is creation of an attractive environment for business activities. We will strengthen the foundation for growing new industries of the future by promoting research and development activities through fostering collaboration between industry and academic institutions. The fourth is the policy measures for small- and medium-sized enterprises. In the current circumstances, where the lending attitudes of private financial institutions are rather cautious, we take appropriate measures to facilitate the supply of necessary funds for small- and medium-sized enterprises. Finally, we believe that we will see the more steady recovery in the latter half of this year, expecting the disappearance of the one-time shock from the raise of the consumption tax, and the improvement of the employment and corporate profits. In addition, the recent Emergent Economic Policy Package includes substantial and effective measures, such as bold deregulation and regulatory reforms. The Government of Japan will implement the measures to regain the confidence on the future of the firms and consumers and put the economy on the path of autonomous private-sector-led growth.

3. Japanese future economic growth

   Q: When you say inthe latter half of this year you see a steady r ecovery,could you elaborate on that a little bit? Are you talkin about in the coming months, or the half that has just gone? And could you give us a growth projection for 1998?

   A: By the latter half of the year, I mean the fourth quarter of 1997, that is October through December, and the first quarter of 1998, from January through March. As I said, as the consumption tax rate was to increase from FY1997, consumers rushed for consumption in order to beat that consumption tax increase, which was obviously the substantial decline in demand in the second quarter of 1997. We are currently on the way toward recovery. The recovery has been delayed into the third quarter (the July to September quarter) and in November, as I stated, the Government adopted and announced a package of economic measures. As businesses and consumers respond to these measures, we hope that the recovery of the Japanese economy will gain further robustness. Having said that, as for this fourth quarter of 1997, we are already toward the end of November, so we expect that as we go through December, January and February, we shall detect a clearer movement toward recovery. As for your second question related to the Government's estimate for next fiscal year's growth rate, the Government will announce officially its growth outlook for FY1998 in December, next month. We have not worked on that yet. Therefore, at this stage, we cannot give any specific number to that percentage.

4. Unemployment in Japan

   Q: I see that yourunemployment rate has gone up to 3.4 percent la st year.Do you expect that the restructuring of the financial sector that you have mentioned, will increase unemployment to higher levels and can the job losses in Japan be comparable to the ones suffered by the American financial sector in the last decade when it restructured?

   A: The unemployment rate in Japan stays at 3.4 percent. Compared to Europe or North America, that is a fairly low rate. Having said that, considering that Japan has had a life-long employment system over the years, this 3.4 percent unemployment rate is a very serious problem. And the labor market in Japan also remains very illiquid. But gradually, the employment system we have had over the years is beginning to change. So as financial big bang and corporate restructuring proceed, unemployment has been increasing and that certainly has very much been a problem for the Japanese economy. I am not in a position to say whether the unemployment rate will be pushed up as a result of the specific failures of Yamaichi and others. We do hope that through mergers and acquisitions, proper corporate resolution and reconstruction and so on, the people out of jobs will not increase. But I also have to say that the fact that we are now beginning to see signs of increase especially in the financial and construction sectors in unemployment. But I have to hasten to add a piece of information here. As of September of this year, the total number of those out of work stood at 2.36 million, out of which 1.01 million were people who voluntarily left their jobs. And the number of people who were forced to quit, that is the non-voluntary jobless people, were only 530 thousand out of the 2 million or so total. This indicates that there is a mismatch in employment. There are that number of people who are unable to obtain the sort of job that they really desire to have. So we have to search for some reasonable solution to address the mismatch problem.

5. Domestic demand-led growth in Japan

   Q: The UnitedStates, in particular, seems to be pressing Japan to do much more to stimulate its domestic economy rather than to rely on exports. Do you think the U.S. request is reasonable and will we see Japan doing a lot more to stimulate its economy beyond what it has already done?

   A: Achieving economic growth led by domestic demand is not something we will do because the United States or certain foreign countries demand us to; rather, we believe it is in Japan's own interest to try and develop its economy through domestic economic revitalization and on the strength of domestic corporate-sector vitality. That, in fact, is our policy orientation. And we believe that the days when we try to develop the Japane se economy through export drive are over. Now it is true that when we look at Japan's trade surplus as compared to the same months over last year. That surplus has been growing due to various factors. For one thing, imports have not been growing that much because the growth rates of the Japanese economy have remained rather slow. When looking strictly at Japan-U.S. trade relations, that trade development has been helped by the economic boom in the United States, also due to exchange rate shifts. At any rate, developing the Japanese economy through increasing exports is not something that we desire; rather, it is the policy of the Government of Japan to lead the economic growth in Japan through strengthening domestic demand.

6. Tax revenue measures to boost the economy

   Q: Can Ijust find out what is the EPA's position on using tax revenues to boost the economy?

   A: We do believe that in view of the current economic situation in Japan, there is a need for some sort of response on the tax system side, but whatever response on the tax system side that we may consider will only lead to less tax revenues. Now, as the Government comes up with its economic growth outlook for FY1998 and the based on that outlook, it calculates likely tax revenues for 1998, then the Government will draw up the draft budget for that fiscal year. As part of that process, we believe there is a need to debate the reform of the tax system. So, as from now on that this process awaits us, I really cannot comment on any specific manner on the question that was just given now.

7. GDP growth rate

   Q: The Japanese Governmentprojection on the GDP growth for FY1997 is about 2.4 percent, but the private institutions in Japan say t hat this is going to be around zero percent. Did you correct your own projections and what are they now?

   A: The Government estimate for the real GDP growth rate for 1997 is 1.9 percent. Now the private institutions have come up with numbers which are significantly lower than that Government estimate. They range from a positive 0.5 percent to the most pessimistic figure which is negative 0.5 percent. Now the Government determined its economic outlook for FY1997 in December last year. In the second quarter of this year (April-June quarter), as I said, there was a significant decline in demand as a backlash to the last-minute rush in consumption. That decline was as much as negative 11.2 percent annualized. Now, as I said, the Government estimate for FY1997 is 1.9 percent and if we are to realize that Government estimate, then we shall have to achieve 8.8 percent annualized growth rate for each of the remaining quarters in FY1997, which of course is a formidable task, we know. But we are not going to give up on that estimate which we take more as a target we should strive to achieve. In order to achieve that estimate, we hope the private business sector as well as the consumers will respond by acting. It is out of that expectation that we adopted the economic package I explained to you about earlier. We do not have an intention to revise the Government estimate downward. That is because a Government estimate is by nature somewhat different private-sector estimates. A Government estimate is not a simple estimate as such; it is also adopted as a target. The Government establishes itself that sort of target in the form of estimate for the Government's policy management as well. Having said that, I also have to hasten to add that the 1.9 percent growth estimate was established in December 1996 and, at that time, our reading of the real growth rate for 1996 was 2.5 percent. Because of the reaction to the impending consumer tax rate increase, actual growth rate for FY1996 turned out to be 2.9 percent, not 2.5 percent. So the actual result for FY1996 turned out to be 0.4 percentage points higher than the Government estimate. That means what should have been consumed in FY1997 was front loaded in FY1996. So I think we have to have this vantage point of looking at both FY1996 and FY1997, and even out the results for the two fiscal years.

8. Japan and Asian economies

   Q: I would like to ask a question with regard to whether the curr ent Asian economic instability will likely be a boon to the Japanese economy or will it work against the Japanese economy, and what sort of measures would Japan be likely to take in response to that kind of situation.

   A: We deem that the Asian financial instability is not having any major negative impact on the Japanese real economy. It is true that we are shall I say holding our breath as to whether this spate of unrest in Asian economies starting out with the currency crisis in Thailand, the tumbling stock market in Hong Kong, which led to global stock decline, will have a negative impact on the Japanese economy. Today, fortunately, in response to the currency crises in Thailand and Indonesia, among others, that the monetary authorities of various countries concerned are cooperating with each other, and packages centered around the IMF are shaping up. So, we do hope that, on the basis of such packages, more concrete measures will be worked out. We are, therefore, watching developments intently at this moment. As far Japan is concerned, we believe, as I stated earlier, that the best way to minimize the negative effects of the Asian financial crisis or instability in the Japanese economy is to see to it that Japanese economic fundamentals are firm. It is for that purpose as well that we introduced the economic package explained earlier. And we hope that on the basis of the package that the Japanese economy will be revitalized. So we are working for medium- to long-term economic sustainable economic growth.

9. Japanese economic package

   Q: There has been some speculation that the Government would rele ase a third economic package which would contain a clause that wo uld allow the Government to use the so-called public funds or taxpayer money in order to support financial markets and also to boost the economy. Can you comment on whether the EPA is actually considering this kind of third economic package and does the EPA support the use of taxpayer money to support the economy?

   A: As far as the Economic Planning Agency is concerned, we believe we have incorporated very bold measures starting with very substantive deregulation measures in the November 18 package. As far as the tax system-related part is concerned, as I said earlier, this is something that shall be considered together with the formulation of the FY1998 budget, the process which starts sometime in the middle of December. When you say third, I am not exactly sure why, but I suppose you are counting the earlier Liberal Democratic Party packages as the first and second. The LDP announced its first package on the 21st of October and its second package on 14 November. And with the exception of the tax-related parts in those packages, we have incorporated all the measures that were suggested by the Liberal Democratic Party in our 18 November package. Whether or not the LDP will work out its third package or not, that is not for me to say. As for the question related to the infusion of public funds in order to cope with the financial situation, I am not in a position to answer that, so allow me to refrain from answering that. Although Mr. Kuroda, the Director-General of the International Finance Bureau of MOF might take up that question later on.