Recent Recovery and Development of Japanese Economy and Business

Embassy of Japan in the Czech Republic

April 3, 2007 in Prague

1. Facts that happened during the so-called “lost decade” in the Japanese economy

� In the beginning of 1990’s, the Japanese “bubble”economy had burst, afterwards, we struggled through “lost decade”.

� During 91 – 01, the average growth rate of real GDP was 1.2 % per year, followed by 2.1 % during 02 – 06.

Real GDP Growth Rate

-3

-2

-1

0

1

2

3

4

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

average growth rate : 1.2 % 2.1 %

� During “lost decade”,

� Huge capital losses in real estate and equity markets, accounting for about 3 times as large as GDP.

� Large non-performing loans(NPLs) and banking crisisin November 1997, breaking down intermediation functions of banks. Capital injections by the government into large banks, thereafter.

Progress of NPLs Disposal

0

10

20

30

40

50

3,99 3,00 3,01 3,02 3,03 3,04 3,05 3,06

0

2

4

6

8

10

(trillion yen) (%)

ratio of NPLs(right scale)

amount of NPLs(left scale)

� Fiscal balance (the general government budget) got worsenedfrom a surplus of near 2 % of GDP down to a deficit 7 % during 91 – 01, caused by stimulativeKeynesian policies as well as by decline in fiscal revenues.

� Price deflation(i.e., the absolute fall in price levels) in terms of consumers price index (CPI) started in 1998.

General government financial balances

-10

-8

-6

-4

-2

0

2

4

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

(pre GDP, %)

Progress of Consumer Price Index

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

( %)

2. Major Accomplishments of Structural Reform

� In April, 2001, Koizumi cabinet established, and it launched many initiatives of structural reforms, thereafter.

� Prime Minister Abe pursues acceleration and deepening of reformsin accordance with “Direction and Strategy for the Japanese Economy” as its economic policy stance.

Mr. Koizumi Mr. Abe

� As the result of the Program for Financial Revival, which was introduced in 2002, the financial system has stabilized, accelerating the disposal of non-performing loans, and advancing integrated responses by industry and finance.

� The partially remaining full deposit guarantee was removed in April 2005 as planned, and the NPLsproblem of major banks was resolved (see page 3).

� Through the expenditure reforms, the ratio of general government expenditure to nominal GDP has been declining(see page 4).

� The bills to privatize Japan Post were passed in October 2005. Japan Post will be privatized in October 2007.

� The plan to reorganize and rationalize public corporations has been executed and out of the 163 corporations to be reformed, 136 corporations were abolished, privatized or underwent other measures. The four Highway-Related Public Corporations were privatized in October, 2005.

3. Current Situation and Forecasts of Japanese Economy

� Japanese economy has been in an expansion phase for more than four years. The expansion period is almost as long as the postwar record.

� The official assessment of the Japanese economy stated as “The economy is recovering, despite some weakness in consumption.”

Cyclical Index (Coincident CI)

80

85

90

95

100

105

110

115

120

91 93 95 97 99 01 03 05 07

Shadowed areasindicate recession.

(2000=100)

� The non-performing loans (NPLs) problem has been normalized, and the “three excesses” in employment, equipment and debts in the corporate sector have almost been eliminated.

� Current profits of corporations have seen a fourth consecutive annual increase in fiscal 2005, and business investment continues to grow strongly.

Tankan Survey

-15

-10

-5

0

5

10

15

20

25

Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ

04 05 06 07

( DI )

Large Enterprises

Medium-sized Enterprises

Small Enterprises

(Forecast)

Progress of NPLs Disposal

0

10

20

30

40

50

3,99 3,00 3,01 3,02 3,03 3,04 3,05 3,06

0

2

4

6

8

10

(trillion yen) (%)

ratio of NPLs(right scale)

amount of NPLs(left scale)

� The employment situation is improving; the effective job offers-to-applicants ratio has gone over 1.00, and the unemployment rate has improved down to lower 4% level.

� The consumer prices have been in rising trend. The eradication of deflation has come into sight.

Price Indices

-2

-1

0

1

2

3

4

03 04 05 06 07

(at annual rate, %)

Corporate Price Index

Consumer Price Index

Employment Situation

3.5

4.0

4.5

5.0

5.5

6.0

03 04 05 06 07

0.2

0.4

0.6

0.8

1.0

1.2

(%) (ratio)

� The growth rate of real GDP in FY2007 is expected to be 2.0%. It is expected that Japanese economy continues to improve both in the business and household sector so that it achieves an autonomous and sustainable growth.

� To achieve a sustained and stable economic growth, the Japanese Economy needs to take in new vitality through “Innovation and Openness”. Aiming at the creation of innovation that contributes to growth, the government will compile and put into effect a long-term strategic guideline, “Innovation 25,” which will have a range of prospects up to 2025 in medicine, engineering, information technology, and a variety of other fields.

Imports

Exports

Pub. Expenditure

Prv. Investment

Prv. Housing Investment

Prv. Consumption

4.94.6

6.27.6

0.3-1.6

3.67.1

0.20.5

1.60.9

2.01.9R. GDP

FY07 (%)

FY06 (%)

(Annual rate)

Thank you for your attention.

Embassy of Japan in the Czech Republic

Tetsuya OGIHARA