Report of the Economic Situation, FY2004-FY2005
"The Conditions for Sustainable Economic Recovery"
－Forecasts for the Japanese Economy in FY2005－
RENGO-RIALS released the Report of the Economic Situation in FY 2004-FY2005 at its 17th forum on October 27, 2004. This paper mainly introduces the "Forecasts for the Japanese Economy in FY 2005."
1. Status of the Economy
The Japanese economy continues to recover. Exports are growing, albeit
at a slightly slower rate, reflecting the recovery of the world economy,
and private non-residential investment is increasing as a result. With
this background, production activities are on increasing trends at slightly
slower rates. Rising corporate profits are improving supply and demand
situation in the labor market but improvement of household income remains
sluggish partly because of the swelling share of part-time workers. Improvement
in individual consumption is limited to a slower pace.
Under these circumstances, the real economic growth rate in FY 2004 is expected to reach 3.2%, thus exceeding 3% for the second consecutive year, due to a remarkable increase in exports and private non-residential investment despite the large drop in public fixed capital formation.
2. Forecasts for FY 2005
(1) Positive factors
The greatly strengthened corporate finances and consequent steady recovery
of corporate profits will continue to support the Japanese economy in the
next fiscal year.
Current profits of listed companies in this fiscal year are expected
to reach a new high for the second year in a row because excessive debts
accumulated during the bubble years have largely been disposed of by recent
restructuring efforts. According to forecasts by various research institutes,
corporate current profits in the next fiscal year will grow by 6 to 8%,
a relatively slower rate, due to increased sales.
Furthermore, the breakeven point is much lower, so any decline in sales would adversely affect current profits to a smaller extent, i.e. companies are more immune to decreased sales.
The non-performing loans of financial institutions, on the other hand,
decreased by 9.9 trillion yen at the end of March 2004 from the previous
fiscal year, down 1.5 percentage points to 6.3%. Uncertainty regarding
the financial system has receded greatly compared to the recent past.
(2) Negative factors
There are two negative factors which may cause the Japanese economy to
slow down.
i) Delayed improvement in household incomes
The greatest challenge to the Japanese economy is that the steady recovery in the corporate sector as mentioned above may not lead to an immediate recovery of household incomes.
In the household sector, real private final consumption in the first
half of this year increased by 1.9% over the second half of last year,
but nominal compensation of employees did not increase much. Individual
consumption was supported mainly by the stronger propensity to consume,
reflecting stronger consumer confidence despite the weak recovery of household
incomes. We fear that individual consumption may decline again unless incomes
improve because improvement of the consumption propensity will be limited,
and the social security burden will be heavier 1) .
Without a substantial improvement of household incomes, we cannot expect
a self-sustaining economic recovery through the continuous expansion of
private final consumption.
ii) Decelerating overseas economies
The U.S. economy is temporally faltering due to the decline in real income resulting from wearing off of tax reductions and increased crude oil prices. When crude oil prices stabilize and the employment situation recovers, individual consumption will expand, which will again boost the economy. If higher interest rates trigger an adjustment of the so-called housing price bubble, the economic trends may be severely affected.
The overheated Chinese economy seems to be heading for a soft landing
thanks to discretionary monetary tightening, but this could result in a
hard landing if the tightening is excessive.
Further, the silicon cycle, which has a major impact on the world's
IT industries, is expected to gradually slow down after peaking during
the Olympic Games in Athens this summer. Many observers consider that the
increase in current inventory is relatively small and its adjustment will
be minor. We should closely monitor the trends as the length and extent
of inventory adjustment largely depend on demand side factors.
(3) Forecasts for FY2005（Attached Table：Economic Model Simulation by RENGO-RIALS）
i) Wage revision reflecting improved labor productivity to be achieved
with no overseas disrupting factors (Case A)
Case A assumes no disturbances in overseas economies and, considering the very low rate of wage increase in recent years, we intend to secure improvement in household income and sustainable economic recovery through appropriate wage revision reflecting the real rate of increase in labor productivity (regular pay raise + recent real rate of labor productivity increase: 3.3%) as corporate profits are expected to rise further.
Case A also assumes that total cash earnings (for 30 employees or more)
will increase by 0.9% for the first time in 8 years and private final consumption
will grow by 1.3% almost at the same rate of FY 2003, though with a slight
slowdown. While the contribution of domestic demand will decline slightly
to 1.5% accordingly, the contribution of external demand will reach 0.6%.
As a result, the real rate of economic growth, beyond the potential growth
rate, will be 2.2% in FY 2005, a slightly lower figure. The unemployment
rate at the end of FY 2005 2) will be brought down to 4.2%, a substantially improved figure. The ratio of active job openings will also improve, to 0.90 by the end of the fiscal year. Consumer prices in FY 2005 will rise, though slightly by 0.2%, paving the way for overcoming deflation.
ii) Worsening overseas situations and wage revision limited to regular pay raise (Case B)
Case B assumes that the negative factors materialize, i.e. improvement
in household income is delayed and the economic situation overseas deteriorates.
The rate of wage revision will be limited to the regular pay raise (1.6%)
and the real rate of world economic growth will be a low 3.8%.
The case assumes that total cash earnings (for 30 employees or more) will decline for the eighth year in a row, by 0.7%, due to the increase in part-time workers and small increase in private final consumption of only 0.9%. The contribution of domestic demand will thus slump to 1.2%. The contribution of external demand will drop to 0.4% due to the sluggish real growth rate of the world economy. As a result, the real growth rate of the Japanese economy in FY 2005 will halve to 1.6% as compared to the figure in FY 2004. Especially, the nominal growth rate of the economy will be 0.6%, a substantially lower figure than Case A. Consumer prices will remain on the previous year's level due to the sluggish growth rate, preventing any escape from deflation.
As the two cases show, FY 2005 will reveal whether the Japanese economy can escape from deflation or not. An important task is to achieve a more appropriate distribution of profits.
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1) Increased social security burden (increased premiums of employees' pension (Oct. 2004), national pension (Apr. 2005) and employment insurance (Apr. 2005)), reduced income deductions (abolition of additional portion of special spouse deduction (Jan. 2004), review of public pension deduction and abolition of elderly deduction (Jan. 2005)), etc.
2) The average figure for the Jan.-Mar. period in 2006. Hereinafter the same.