In 2003, the Japanese economy, second
in size only to that of the United States, finally appeared
to be coming out of both the recessionary phase of a short-term
economic cycle and a longer period of gloom now referred to
as "the lost decade." Corporate earnings and stock
prices both enjoyed a visible upturn, and industrial production
and corporate capital investment also gathered steam on the
back of strong external demand. Government efforts to rebuild
the financial system have made some progress thanks partly to
injections of public funds into major banks and the recent recovery
in stock prices. The system as a whole, however, has not yet
revived.
The Cabinet Office in September 2003 revised its gross domestic
product forecast upward, calling for nominal growth of 0.1%
in fiscal year 2003 (through March 2004), compared with its
January projection of a 0.2% contraction. If the forecast holds
true, fiscal year 2003 will see the first positive growth in
nominal GDP in three years.(*1)
Optimism is not warranted, however, over the future of the economy.
The unemployment rate remains high at more than 5% (*2), and
there are no signs of rapid pickups in job offers. The issue
of excessive corporate debts has not been fully addressed and
sharp appreciation of the yen against the dollar could hinder
export-led recovery in the corporate sector. Household income
has not grown, inhibiting any marked recovery in consumer spending.
People's spending priorities have been chiefly on goods and
services essential to their daily lives, dipping into savings
when income is insufficient, as shown recently in a marked fall
in the household savings rate. Moreover, the US fiscal and current-account
deficits could turn into major disruptive factors for the domestic
economy over the long run.
The Japanese economy has entered a recovery phase three times
since the collapse of the bubble economy in the early 1990s,
but business sentiment failed to pick up significantly in any
of these upturns, except among large manufacturers. Smaller
non-manufacturing businesses, in particular, have been in the
doldrums for years, depressed by festering structural woes and
heavy debt burdens. Since non-manufacturing companies make up
about 70% of the country's total capital expenditures, overall
corporate spending, the main impetus of recent economic recovery,
will not gain real momentum unless they draw up major spending
schemes.
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