This document is compiled by the Ministry of Foreign Affairs to provide overseas users with brief information on Japanese economy and structural reforms.

Japanese Economy and Structural Reforms

As of September 5, 2002

1. Basic Information

(Basic Points)

• The Japanese economy is in a difficult position over the short-term. The "intensive adjustment period" will last for about two years.
  - Real GDP growth in FY2002 is expected to remain flat. In FY2003, general recovery phase is expected to set in toward sustainable economic growth.
• Japan is seriously pursuing structural reforms and implementing concrete measures.
• Over the medium-term, structural reforms are expected to result in private-sector-demand-led growth.
  - Real GDP growth from FY2004 onward is expected to be steady, at least 1.5 percent.

(Causes of the Japanese economy's long-term stagnation)

(1) Anxiety among Japanese people about the future of fiscal situation, employment and social security weak consumption.

(2) Problem of non-performing loans problem in intermediary functions of financial institutions.

(3) Problem of resource distribution lack of efficiency in economic activities.

(Response measures)

(1) Through fiscal reforms and the expansion of safety nets, it is expected that people's anxiety about the future will be alleviated.

(2) By solving the problem of non-performing loans, it is expected that intermediary functions of financial institutions will recover and financial resources will be directed to growing sectors.

(3) By making progress in regulatory and administrative reforms, it is expected that competition and technological innovation will be promoted and economic activities will be more efficient.

(Structural reforms of the Koizumi Cabinet)

• Although the Japanese economy has bottomed out cyclically, the Koizumi Cabinet believes in "no growth without reform," and is resolved to continue to implement structural reforms leaving no sanctuary.
• The government regards deflation as the most important challenge to be tackled in the "intensive adjustment period," likely to last about two years. By promoting structural reforms, the government intends to revitalize the economy, and makes efforts to overcome deflation.
• The basic concept of structural reforms is to raise potential growth rate through the redistribution of human and financial resources from less efficient sectors to those with high efficiency and much social needs (the supply side), while realizing potential demands and promoting private consumption and investment (the demand side).
• The pillars of structural reforms are drastic resolution of the non-performing loans, tax system reform, regulatory reform, reform of special public corporations and fiscal reform.

2. Current Situation and Perspective of the Japanese Economy
-While the Japanese economy continues to be in a difficult situation, movements of an incipient recovery can be seen in some areas.-

• Negative aspects
  - Real GDP growth in FY2001 marked negative (1.9%) for the first time in three years (calendar year: 0.2%).
  - "Moderate deflation" is continuing.
  - The employment situation is severe (the total unemployment rate in July 2002 was 5.4%).
  - Private consumption, which accounts for about 60% of GDP, is flat.
• Positive aspects
  - Export, particularly to Asia, is increasing.
  - Industrial production is showing movements of an incipient recovery, reflecting the increase in export and the advancement of inventory adjustment.
• Structural reforms will be implemented with the emphasis on expanding private-sector demand and employment. The government of Japan has adopted "Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2002" (Basic Policies No. 2), which include the propulsion of "the Economic Revitalization Strategies," "Tax Reform" and the reform of government expenditures over the medium-term. By advancing these in trinity, Japan will realize steady private demand-driven economic growth over the medium-term.

3. Structural Reforms of the Koizumi Administration (Overview)

Expectations of Structural Reforms of Koizumi Administration

4. Disposal of Non-performing Loans
-To Be Normalized in FY2004 (March 2005)-

• Since October 2001, in order to promote final disposal of non-performing loans, the Government of Japan has stepped up its efforts more vigorously than ever before, through the following measures: (i) implementation of "special inspections"; (ii) enhancement of the function of the Resolution Collection Corporation (RCC); (iii) request for the establishment of corporate reconstruction funds.
  1. In April, the results of the "special inspections" were announced.
     - Of the 12.9 trillion yen in assets subject to the special inspections, 3.7 trillion yen worth of loans were additionally classified in the category of being in danger of bankruptcy or below.
  2. In order to enhance RCC's function, the legislation was enacted in January, permitting the "purchase of non-performing loans at market price", and in March, "the headquarters for the promotion of the assets purchase" was established. Also a request has been made to Japanese Bankers Association to dispatch personnel to the Headquarters, according to the needs for specific projects.
  3. Several corporate reconstruction funds have been developed, including "the Japan Recovery Fund," which was established mainly by private banks in March 2002.
• Aiming at the disposal targets (in principle, 50% of the non-performing loans should be disposed within one year, and approximately 80% within two years), and actively utilizing the function of the Resolution and Collection Corporation (RCC), efforts will be made to accelerate the off-balancing of non-performing loans and to normalize the non-performing loan problem in FY2004.

5. Measures to Tackle Deflation
- Early Implementation of Basic Policies No. 2 is the Most Effective Measure to Tackle Deflation -

• The Government of Japan regards deflation as the most important challenge to be tackled. - In February, "Emergency Countermeasures to Deflation" were announced, recognizing that resolution of the problems in the financial sector is crucial in overcoming deflation.
• The government will advance structural reforms, focusing on expansion of employment and private-sector demand. The realization of self-sustaining economic growth will be the basis for overcoming deflation. -Basic Policies No. 2 was adopted by the Cabinet in June.
• Basic Policies No. 2 will serve as the foundation for Japan's countermeasures to deflation. Through the early implementation of the Basic Policies No. 2, efforts against deflation will be accelerated. The Government of Japan, together with the Bank of Japan, will continue to enforce vigorous and comprehensive measures to overcome deflation, including identifying the items in the Basic Policy No. 2 that can be implemented immediately and carrying them out.

6. Tax Reform
-With utmost emphasis on restoring the vitality of the Japanese economy-

• From the beginning of 2002, discussions were initiated on a desirable tax system in the related organs such as the Council for Economic and Fiscal Policy and the Tax Commission.
• The basic principles of tax reform were presented in the Basic Policies No. 2.
  -With a view to ensuring that the tax system is "broad, light and simple," the structural burden of income tax, inhabitant tax and corporate tax will be under consideration.
• The Tax Commission submitted "Basic Policy toward Creating a Desirable Tax System." (June 2002)
• Discussion will continue towards tax reform for FY2003.

7. Progress in Structural Reforms

Disposal of Non-performing Loans

• According to the outcomes of the special inspections announced on 12 April 2002, 3.7 trillion yen worth of loans were additionally classified in the category of "in danger of bankruptcy or below."
• Aiming at the disposal targets (in principle, 50% of the non-performing loans should be disposed within one year, and approximately 80% within two years), and actively utilizing the functions of the Resolution and Collection Corporation (RCC), efforts will be made to accelerate the off balancing of the non-performing loan and to normalize the situation in FY2004.

Regulatory Reform

• In addition to traditional "economic sectors," various reforms are under way in "social sectors" (medical care, welfare, childcare, etc.), which had not been targeted in previous regulatory reforms.

Reform of Special Public Corporations

• Of the 118 special public corporations (excluding the 45 mutual aid associations), it was decided that 17 will be abolished, 45 will be privatized, and 38 will become independent administrative institutions (December 2001).
• Fiscal expenditure on special public corporations has been reduced by more than 1 trillion yen (FY2002 budget).

Fiscal Reforms

• In the FY2002 budget, the government achieved its goal of "keeping government bond issuance under 30 trillion yen." The idea of "budget for resolute reforms" was realized through the implementation of drastic expenditure review and prioritized distribution.

Employment, Small and Medium Enterprises (SMEs), etc

• Compared to the last year, the number of employees decreased by 4.9% in the manufacturing industry. However, during this year of negative growth, there has been a rise in employment in the service sector by 2.7%.
• A system has been established to regard the accounts receivable of SMEs as collateral which will ensure new opportunities for SMEs.

Others

• The number of offices, with the ISO14001 certification has increased 2.7-fold in the last two years (to 7,624 as of November 2001)
• The number of subscribers to high-speed and ultra-high-speed Internet access has increased rapidly over the last year from 640,000 to 2.8 million.
• Cross-holding of shares is rapidly decreasing and mergers and business alliances across keiretsu are increasing.
• International patent applications have increased rapidly, from 7,429 in 1999 to 11,688 in 2001.
• The number of new venture businesses that are going public in the three emerging stock markets (JASDAQ, Mothers, Nasdaq Japan) is rapidly increasing. (62 in 1998, 75 in 1999, 164 in 2000, 148 in 2001)
• The number of venture businesses generated from universities has rapidly increased. (128 in September 2000 263 in December 2001)
• After the decision to open up some government businesses to the private sector, private companies have started to prepare entering the new markets.
  - Following the announcement that the Government Housing Loan Corporation would be abolished, banks began to develop more attractive services.
  - As a result of the policy announcement to allow the private-sector to enter the postal businesses, private companies began to consider making capital investment and securing necessary human resources in this field.

(Reference) Japan's Economic Strength

I. Per Capita GDP (nominal) and GDP Scale

II. Foreign Net Assets

III. Foreign Currency Reserves

IV. Current Account

V. Personal Financial Assets¹

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