Lyon Summit Information

Background Briefing
by Official of the Economic Planning Agency

TRANSCRIPT

Vision for Japan's Economy

Speaker:Official of the Economic Planning Agency

Date:26 June 1996

Time:16:00 -- 16:30

Location:Japanese Press Briefing Tent Palais des Congres Lyon, France

MAJOR TOPICS

1. Introduction of speaker and briefing status
2. Recent situation of the Japanese economy
3. Economic policy
4. Possibility of maintaining current interest rates in Japan
5. Possibility of a need for an additional supplementary budget
6. Announcement of interview availability of the Spokesmen for the Japanese Delegation to the G-7 Summit in Lyon

1. Introduction of speaker and briefing status

   Moderator:Good afternoon, ladies and gentlemen. Welcome to this background briefing by the Japanese delegation on "A Vision for Japan's Economy." Before we begin, I would just like to remind you of the ground rules for this briefing. Today's speaker will be from the Economic Planning Agency. As this is a background briefing, you may not quote him by name or title. You may cite the source only as "an official of the Economic Planning Agency." The briefer will begin with a brief statement, with consecutive interpretation in English. Following this statement, the briefer will open the floor to questions. If you have a question, please raise your hand and wait to be recognized by the briefer. Once you are called on, please proceed to the microphone. Please state your name and affiliation before proceeding with your question. Thank you very much, ladies and gentlemen.

2. Recent situation of the Japanese economy

   Speaker:Ladies and gentlemen, allow me to provide a brief explanation with regard to the recent situation of the Japanese economy. The Japanese economy has been on the course of gradual recovery since the end of 1993, while it stalled momentarily last year. Its recovery is affirmed now, with some acceleration in its economic growth rate. Figure 1 in the set of materials which has been distributed shows trends in real GDP growth. In the October-December quarter of 1995, the growth rate was 1.2% over the previous quarter, and in the January-March quarter of 1996, the growth rate was 3%. The first quarter 1996 growth may have been affected by some one-time elements, like the leap-year effect. However, we can see the effects of the largest-ever economic stimulus package, amounting to 14 trillion yen, adopted in September 1995, as well as the extremely low 0.5% official discount rate. So, we have seen these important policy effects. There has been a significant contribution made by public demand, as well as by the housing starts which have been stimulated by extremely low interest rates. Now, apart from that, we have also seen contribution made by steady increases in personal consumption as well as capital investment, and therefore, we can now expect a shift due to growth due to policy effects toward a more self-sustained recovery built on private demand. We believe that the Government's estimate for this fiscal year of 2.5% growth is attainable. Having said that, there certainly do exist some worrisome elements, such as a very difficult employment situation. So, we shall have to continue to watch economic developments very carefully. But at the same time, we believe that we shall in fact try to lead the Japanese economy onto the path of medium- and longer-term sustained development by addressing structural reforms. I should like to draw your attention now to Figure 2 and onwards, to look at recent developments in private demand, and more specifically, private consumption. As Figure 2 indicates, while retail sales were in the negative compared to the previous year, 1995, the growth has turned to a positive in 1996. Figure 3 shows capital investment by businesses, and you can see that, as far as major businesses are concerned, in the manufacturing sector in FY1996, their capital investment plans will increase by 6.7%, following similar growth in the previous year. In the non-manufacturing sector, it will revert to a 5.7% growth, following declines for four years in a row. The background to such increases in capital investment is the improving or recovering business earnings, as well as the improving of business confidence -- business sentiment. As the bottom half of Figure 3 shows, this trend has been effected by policy effects as well as a correction in the strong yen. As indicated on Figure 4, as far as housing construction is concerned, due to declining interest rates, housing construction has started to recover in the latter half of 1995. Let me now turn to Japan's trade and international balance of payments. As it was clear in Figure 1, external demand, or net exports, were a negative contributor to Japan's growth. That was due specifically to yen appreciation as well as its subsequent structural change. As Figure 5 shows, export volume has remained flat, whereas import volume has been increasing rather rapidly since 1993, which is due to a significant increase in manufactured imports due to yen appreciation as well as deregulation. As a result, manufactured imports as a percentage of total imports, which stood at about 30% in the past, reached close to 60% last year. As a result, as Figure 6 indicates, Japan's current account surplus has decreased very rapidly to 9.5 trillion yen in FY1995, or 1.9% of nominal gross domestic product. This trend of declining current account surplus likely will continue, even if at a slower pace. Figure 7 shows price developments, and as you can see, in addition to declining domestic wholesale prices, more recently, consumer prices have also declined. Now, within this relatively improving Japanese economy, one area which still remains very tough is the employment situation. As Figure 8 indicates, Japan's unemployment rate in FY1995 hit the worst level ever of 3.2%, and even in recent months, we have seen the high level of 3.4%. Businesses still feel they have too many employees on payroll, and as we also expect, women who had given up the hope of working and gone back to their households may return to the labor market and, therefore, as a trend, it is difficult for the unemployment rate to decline.

3. Economic policy

   Speaker:If I may discuss policy, as I stated earlier on, the major task for the Japanese economy in the immediate days ahead is to shift the Japanese economy from recovery built on policy effects to a medium- and longer-term self-sustained development based on private demand. This policy objective of putting the Japanese economy on a self-sustained growth path built on private demand without depending on central government budget is necessitated by the budgetary situation as well. As Figure 9 shows, the debt outstanding of the central government, although it declined somewhat in the past, has been increasing again due to several packages of economic stimulus adopted in the recent several years, so much so that debt outstanding as a percentage of nominal GDP has today reached 48%. From the vantage point of putting the Japanese economy on a course towards economic recovery built on private demand, and to lead that into a medium- and longer-term sustained development, it is necessary as a policy agenda for the time being to address structural reform, such as further deregulation and the creation of new industries. I would like to stop here with my initial briefing and would like to entertain any questions you might have.

4. Possibility of maintaining current interest rates in Japan

   Q: You mentioned the record low discount rate of 0.5%. Clearly this is not a decision which is in the hands of your department. On the face of the figures you have shown us and of the picture you have painted of the Japanese economy, it sounds as if we can count on having those very low interest rates to continue for some time, and if not, how long?

   A: As you rightly pointed out, interest rate policy is a matter for the Bank of Japan to decide, and therefore I am not in a position to comment on it. To the extent I am aware of the remarks made by the Governor of the Bank of Japan recently, I am given to understand that the Bank of Japan does not intend to change the stance they have maintained to date.

5. Possibility of a need for an additional supplementary budget

   Q: There has been some concern that in the second half of this year, that as the effects of the fiscal stimulus fade, it may be difficult for there to be a switch to a private-demand-led recovery. Do you think there is going to be a need for one more supplementary budget to ensure that there is a smooth transition?

   A: It goes without saying that what is fundamentally necessary is to watch very carefully the economic developments from here on, and consider what policy would be necessary to address those economic developments. As I explained earlier, as we look at that demand growth for the first quarter this year, as well as capital investment plans by businesses, we feel that there is now a greater probability than it was believed several months ago that the growth will switch from a policy-effect-led growth to a private-demand-led one.

   Q: Are you indicating, then, that maybe there will not be a need for a supplementary budget later this year?

   A: There are supplementary budgets of different natures, and therefore we cannot really discuss that matter in a simple manner. But, as I indicated, I believe the economic situation today is somewhat different than it was described several months ago. I might also add that, as a basic philosophy, we also have to bear in mind that we need to address economic restructuring more actively for this same purpose -- that is, to put the Japanese economy on a private-demand-led growth path.

6. Announcement of interview availability of the Spokesmen for the Japanese Delegation to the G-7 Summit in Lyon

   Moderator: Are there any more questions? Thank you very much. The conference is now concluded; however, I would like to make some announcements. The Japanese delegation has set up the Japanese Press Liaison Office. We also have two spokesmen -- Spokesman for the Japanese Delegation to the G-7 Summit in Lyon, Mr. Hiroshi Hashimoto, for the English-speaking press, and Spokesman for the French-speaking Press, Mr. Kaoru Ishikawa. So, if you wish to interview either gentleman, please contact us at the Japanese Press Liaison Office at 7259-8248.

   Thank you very much.