Country Report Japan at a Glance: 2003-04
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Country Report September 2003 Japan Japan at a glance: 2003-04 OVERVIEW The prime minister, Junichiro Koizumi, should win the September Liberal Democratic Party (LDP) leadership election, although a small margin of victory may reduce his political authority within the party. The LDP is likely to win the next lower house election, reflecting both Mr Koizumi!s public popularity and the party!s well-organised grass-roots organisation. The Economist Intelligence Unit forecasts that real GDP will grow by 2% in 2003 and by 1.6% in 2004. Growth will be supported by a recovery in domestic demand. Consumer prices will fall by an average of 0.3% in 2003 and 0.5% in 2004. Large current- account surpluses will be recorded in both years. Key changes from last month Political outlook • Mr Koizumi indicated in mid-August that he would be prepared to include some of his opponents within the LDP in the cabinet at the next reshuffle, provided they are willing to commit to his reform programme. This was most likely an attempt to divide his opponents ahead of the September 20th party leadership election. Economic policy outlook • The government approved the guidelines of the budget for fiscal year 2004/05 (April-March) in late July. Overall spending is slated to rise by 5% to ¥85.7trn (US$726bn), but discretionary spending is likely to remain flat. Economic forecast • Following the release of GDP data for the second quarter of 2003, we have made extensive revisions to growth forecasts for 2003-04. This largely reflects revised assumptions about prospects for domestic demand. • The all-industry business activity index compiled by the Ministry of Economy, Trade and Industry rose by 0.9% in June month on month. This was the fastest rise since January this year. The tertiary industry sub-index rose by 1.3% month on month in June. Both results suggest a deepening and broadening of the economic recovery. September 2003 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group. 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Japan 1 Contents 3 Summary 4 Political structure 5 Economic structure 5 Annual indicators 6 Quarterly indicators 7 Outlook for 2003-04 7 Political outlook 8 Economic policy outlook 9 Economic forecast 13 The political scene 17 Economic policy 20 The domestic economy 29 Employment, wages and prices 32 Financial indicators 35 Foreign trade and payments List of tables 9 International assumptions summary 10 Gross domestic product by expenditure 12 Forecast summary 14 LDP faction strengths 17 Budget guidelines for 2004/05 18 National government debt 21 Expenditure on gross domestic product, quarter on quarter 21 Expenditure on gross domestic product, year on year 23 Contributions to real GDP growth 24 Tankan survey results 24 Retail sector indicators 27 Vehicle production and registrations 27 Industrial production, shipments and inventories 28 Machinery orders 29 Construction industry 29 Employment statistics 31 Wages and costs 31 Inflation indicators 32 Money supply 33 Bank lending 34 Financial market indicators 35 Trade values, volumes and prices 36 Bilateral merchandise trade flows Country Report September 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 2 Japan 36 Exports of selected commodities 37 Imports of selected commodities 38 Balance of payments, IMF basis List of figures 12 Gross domestic product 12 Consumer price inflation 23 Business sentiment among small and medium-sized firms 26 All-industry activity index 35 Exchange rate Country Report September 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 Japan 3 Summary September 2003 Outlook for 2003-04 The prime minister, Junichiro Koizumi, should win the September Liberal Democratic Party (LDP) leadership election, although a small margin of victory may reduce his political authority within the party. The LDP is likely to win the next lower house election, reflecting both Mr Koizumi!s popularity and the party!s well-organised grass-roots organisation. Real GDP will grow by 2% in 2003 and by 1.6% in 2004. Growth in the period will be supported by a recovery in domestic demand. Consumer prices will fall by an average of 0.3% in 2003 and 0.5% in 2004. Large current-account surpluses will be recorded in both years. The political scene The largest opposition party, the Democratic Party of Japan, and the much smaller Liberal Party agreed in July to merge by end-September. Parliament passed legislation in July enabling the Self-Defence Forces (SDF, the de facto military) to be sent to Iraq to assist in post-war reconstruction, but concern about the region’s instability is likely to delay dispatch until early 2004. Economic policy At end-July the government approved the basic budget guidelines for fiscal year 2004/05 (April-March). Total spending will rise by nearly 5%, to ¥85.7trn (US$726bn), partly reflecting an assumed 6% year-on-year increase in debt- servicing costs. The Industrial Revitalisation Corporation has had difficulty in finding companies to rehabilitate. Its first candidate is a regional bus company, Kyushu Industrial Transportation. In July parliament passed legislation enabling life insurance companies to cut pay-outs on guaranteed policies. The domestic economy Real GDP grew by a faster than expected 0.6% in the second quarter of 2003 in quarter-on-quarter terms. The outbreak of Severe Acute Respiratory Syndrome (SARS) in the region had a positive impact on growth in Japan. Outward tourism fell, boosting private consumption and suppressing services imports. Employment and wages grew modestly in the first half of 2003, supporting a small recovery in consumer sentiment in the forecast period. Consumer price deflation has eased, mainly as a result of volatile oil prices and increases in prices for fresh food. Large-scale Japanese intervention on the currency markets helped to keep the yen in a narrow band of ¥118-120:US$1 in January-August. Foreign trade and payments The merchandise trade surplus (fob-cif) narrowed by 10% year on year in the first six months of 2003 to ¥4.4trn. The rapid growth of the cost of imports, as global oil prices remained relatively high, was largely responsible for the deterioration. Demand from China remained robust. In August Japan raised tariffs on beef imports. The current-account surplus narrowed in January-June by ¥626bn (US$5.3bn) to ¥5.4trn. Editors: Robert Ward (editor); Graham Richardson (consulting editor) Editorial closing date: August 26th 2003 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule Country Report September 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 4 Japan Political structure Official name Japan Form of government Representative democracy The executive The prime minister is chosen by a ballot of the Diet (parliament) and appoints a cabinet, a majority of whose members must also be members of the Diet Head of state Emperor Akihito National legislature Bicameral Diet, comprising the 480-member House of Representatives (the lower house), elected every four years, and the 247-member House of Councillors (the upper house), elected for six-year terms, with half of its number elected every three years. There are 300 single-seat constituencies and 180 seats filled by proportional representation in the House of Representatives. The number of seats in the upper house will be reduced by five at the chamber’s next election Legal system A US-style Supreme Court, appointed by the cabinet, presides over a legal system of lesser courts divided into four arms: the High Court, District Courts, Family Courts and Summary Courts National elections The last election was in July 2001 (House of Councillors); the next election for the House of Representatives is due by June 2004.