Development Bank of Japan
Research Report
No. 44

Recent Trends in the Japanese Economy:
A Medium-term Scenario for the Japanese
Economy with Special Focus on the Flow of Funds
and FinanceMarch 2004

Economic and Industrial Research Department
Development Bank of Japan

This report was originally published in Japanese as Chosa No. 59
in December 2003.

Contents

Summary ......................................................................................................................... v
I

World Economy Picking Up, Led by U.S. and Asia............................................. 1 (Figures)
1. U.S. (1): Personal Consumption Boosted by Tax Reduction,
Plant and Equipment Investment Recovering ................................................... 1 (29)
2. U.S. (2): Production Showing Signs of Improvement,
Delayed Recovery in Employment.................................................................... 1 (30)
3. Economies of Major European Countries (Germany, France, U.K.):
Looking for Recovery ....................................................................................... 1 (31)
4. Economies of Major Asian Countries (Korea, Taiwan, Singapore):
From Slowdown to Upturn................................................................................ 2 (32)
5. China: Resuming Rapid Growth with Limited Impact of SARS ...................... 3 (33)

II

Japanese Economy: From Standstill to Slight Recovery..................................... 4
1. Sustainability of Domestic and Overseas “Digital Boom”
Holds the Key to Further Recovery................................................................... 4 (34)
2. Production Recovering after Temporary Standstill ........................................... 7 (35)
3. Harsh Employment Situation, but Improving ................................................... 8 (36)
4. Wages Bottoming Out, Consumer Confidence Improving................................ 9 (37-38)
5. Plant and Equipment Investment Increasing, but Ratio to
Cash Flow Still Subdued ................................................................................. 10 (39)
6. Leading Indicators Showing Strength, Attention Focused on
Corporate Profits ............................................................................................. 12 (40)
7. Weak Residential Investment .......................................................................... 13 (41)
8. Public Investment Falling due to Difficult Financial Situation....................... 14 (42)9. Signs of Recovery in Exports and Mild Increase in Imports........................... 15 (43)
10. Deflation Continues but Slows........................................................................ 15 (44)
11. Effect of Quantitative Easing Policy Yet to Materialize.................................. 16 (45)

III A Medium-term Scenario for the Japanese Economy−Focusing on Money Flow and Finance− ........................................................ 17
1. Long-term Trends in Financial Surplus/Deficit and Outstanding Loans......... 17 (46)
2. Changing Flow of Funds in Japan since 1990................................................. 17 (47)
3. Background of Medium-term Scenario........................................................... 18 (48)
4. Medium-term Outlook of Financial Surplus/Deficit by Sector ....................... 19 (49)
5. Private Business Sector to Maintain Financial Surplus................................... 19 (50)
6. Household Savings Ratio to Decline, Reducing Share of
Cash and Deposits ........................................................................................... 20 (51)
7. Primary Balance to Improve despite Further Increase in
Government Debts........................................................................................... 22 (52)
8. Current and Future Behavior of Private Financial Institutions........................ 22 (53)Development Bank of Japan Research Report/ No. 44i(Appendix 1)(Appendix 2)(Appendix 3)

ii

Trends in Public Finance ....................................................... 24 (54)International Comparison 1:
Financial Surplus/Deficit by Sector....................................... 24 (55)International Comparison 2:
Nonfinancial Business Financing .......................................... 25 (56)International Comparison 3:
Household Money Management............................................ 25 (57)
Views on Medium-term Prospects for the Japanese
Financial System.................................................................... 26 (58-59)

Development Bank of Japan Research Report/ No. 44

Analysts and Writers:
Hajime Wada
Junichi Nakamura
Takanori Wada
Yosuke Kagabayashi
Yoshiaki Hachiya
Daisuke Saginoue
Hiroko Iwaki

Overall supervision
Sections II-1, II-2, II-5 and II-6
Sections I-3, I-4 and I-5
Sections II-8, II-11, III-1, III-2, III-3, III-4, III-5, III-7,
III-8 and Appendix 1
Sections II-3, II-4, II-7, II-10 and III-6
Sections I-1, I-2, II-9 and Appendix 2
Appendix 3This report is based on statistical data published by November 27, 2003.

Development Bank of Japan Research Report/ No. 44iii

Recent Trends in the Japanese Economy:
A Medium-term Scenario for the Japanese Economy with Special Focus on
the Flow of Funds and Finance
Summary
I. The major economies of the world, particularly the U.S. and Asia, are starting to recover.
In the U.S., personal consumption is remaining strong thanks to substantial tax cuts by
the Bush administration, and plant and equipment investment in information technology isrebounding. However, the trade deficit with
China has surged, and the issue is whether the
economic recovery will lead to a sustained recovery in employment.
In Europe, the German and French economies have suffered due to the fluctuation of theeuro against the dollar. As consumption in the
U.K. remains strong backed by personal lending,the Bank of England raised interest rates to calm
the overheated economy.
Major Asian economies have picked up as
the SARS epidemic has subsided. In South Korea,
however, consumption has slowed due to checks
on personal lending and the impact of the prolonged strike of cargo workers.
The Chinese economy has been growing
rapidly, led by fixed asset formation and private
consumption. Deflation in 2002 turned to inflation in 2003, and there is a risk of a real estate
bubble or economic overheating, with possible
inflows of capital from overseas in anticipationof the Rmb being revalued upward.
II. The Japanese economy finally started moving again in the latter half of fiscal 2002, as plantand equipment investment has recovered mainly
in digital household electronic appliances. Further recovery depends on the sustainability of the“digital boom” both in Japan and overseas, but
economic growth is forecasted to slow in thesecond half of fiscal 2004.
The current supply condition indicates thatthe inventory cycle has returned to a buildup
phase since September, after nearly entering an
adjustment phase. Production leveled off in Oc-

tober-December 2002, but has started to growagain since September 2003, led by electro-devices and related manufacturing equipment.
Tertiary industry activity looks weak, with mixed
performance. Construction activity is bottoming
out in the private sector, but remains stagnant
overall with cutbacks on public works projects.
In employment, the recovery among large firms
has not eased the unemployment rate, which remains above 5% and is particularly severe
among young people.
On the demand side, consumption has been
weak since the second half of fiscal 2002, withthe exception of digital household electronic appliances. Plant and equipment investment has
been increasing particularly in the manufacturingsector. Leading indicators also point to healthy
growth, but investment is subdued relative tocash flow, indicating a selective attitude toward
investment. The sustainability of rising corporate
profits will affect the future of plant and equipment investment. Residential investment remains
weak. Public investment is going to decline inboth central and local governments due to financial difficulties. Exports show signs of recovery
mainly to China and the rest of Asia, while imports continue to rise gradually.
In finance, the continued quantitative easing
policy of the Bank of Japan has had little effect,
as it has been absorbed by the decline in themoney multiplier and the velocity of money. Although consumer prices are likely to bottom out,
the prolonged deflation indicates that the monetary easing policy will continue for some time.
III. In January 2003, the government adopted
the “Reform and Perspectives – FY2002 Revision” by a Cabinet Decision. Covering the period
through fiscal 2010, the “medium-term scenario”
presented in Chapter III considers possible
changes in financial surplus or deficit in eachsector as well as in the flow of funds as a whole,if the structural reform advances as planned, ef-

Development Bank of Japan Research Report/ No. 44v

fectively setting the Japanese economy on a stable growth path. Chapter III also examines how
the investment behavior of financial institutions
will change in response to such an external environment. The results are summarized as follows.
(1) Thecurrent
practiceoflimiting
non-residential investment within cash flow
will continue in the private sector. In otherwords, private firms are expected to maintain a large financial surplus, barring any
change in the distribution of profits. Thus,
borrowings from financial institutions willcontinue to fall. Financing utilizing assets
will also suppress financial liabilities.
(2) The household sector will maintain a financial surplus, albeit on a smaller scale due tothe aging of the population. Measured atmarket prices, the share of cash and deposits
in total household financial assets will decline, while that of stocks and securities willrise gradually.

(3) The Cabinet Office Background Paper indicates that the primary balance of the government sector will not move into surplus
until at least 2010. Thus, outstanding public
debts will continue to increase, from an estimated ¥637 trillion at the end of FY2003
to almost ¥900 trillion at the end of FY2010.
(4) Based on the financial surplus or deficit ineach of the above three sectors, it may beconcluded that private financial institutions
will continue to curb corporate lending,while extending more loans to thefund-starving public sector and increasing
housing loans and personal loans. With thedecrease in total outstanding loans, financial
institutions will have to choose between focusing on fee-based businesses or specializing in settlement operations.

(As of December 2, 2003)

by the Economic Research Group (e-mail: report@dbj.go.jp)

vi

Development Bank of Japan Research Report/ No. 44

I World Economy Picking Up, Led
by U.S. and Asia
1.

U.S. (1): Personal Consumption Boosted
by Tax Reduction, Plant and Equipment
Investment Recovering(see p. 29 for Figures)

The U.S. economy is resuming its recovery. After slowing down in October-December 2002 andin January-March 2003, real GDP growth in the
U.S. (Figure 1-1) grew strongly in April-Juneand July-September 2003, up 3.3% and 8.2%
(preliminary estimate) respectively on the previous period on an annual basis. Real GDP growthin July-September was led by personal consumption, which was also supported by rising plantand equipment and residential investment.
Personal consumption (Figure 1-2), led bybuoyant automobile sales, has increased thanks
to the large-scale tax reduction measures and low
interest rate policy adopted by the Bush administration. Consumer confidence is finally showing
some improvement, after remaining low despite
the rise in share prices due to the Iraq War anddifficult employment situation. This improvement is the result of the end of the Iraq War in
May 2003, as well as softening pessimism about
the economy and employment situation in linewith the recovery in corporate profits and some
improvement in employment. Attention should
now be focused on the increase of personal consumption toward the second half of 2004, as thetax reduction effect is expected to subside.
Following a mild recovery, corporate profits
jumped in July-September 2003 (Figure 1-3).
Although plant and equipment investment declined in January-March 2003, it grew in
April-June 2003, followed by an even larger increase in July-September 2003, due mainly tomajor hardware investment in information technology-related industries.
2.

U.S. (2): Production Showing Signs of
Improvement, Delayed Recovery
in Employment(see p. 30 for Figures)

The industrial production index declined once inApril-June 2003, then increased again in

July-September 2003 (Figure 1-4), because
production rose in both consumer goods andequipment. The capacity utilization in the manufacturing sector remained low at below 75% in
July-September 2003, but is showing signs ofrecovery and recorded a slight rise recently.
The employment situation remains harsh,
although the long-term decline in the number of
employees has come to a halt thanks to thegrowth of employment mainly in services (Figure 1-5). The slight increase in the number employed suggests that the unemployment rate,
which remains around 6%, has reached its peak.
The U.S. trade deficit has been widening(Figure 1-6). In 2000, China overtook Japan as
the trade partner with the largest trade surplus
with the U.S. Aggregate statistics from January
through May 2003 also show a significant U.S.
trade deficit with China. Imports from Japan
have been largely limited to automobiles in recent years, whereas imports from China include awide range of products including toys, sporting
equipment, electrical equipment, office equipment and footwear.
In the financial sector (Figures 1-7 and 1-8),
share prices continued to slide as the situation in
Iraq worsened, then rose when the war started.
The trend of share prices is upward in line withexpectations for the recovery of the U.S. economy.
Recently, however, they have been holding steadyat just under $10,000 due to allegations of irregular trading in investment trusts and rising concerns
about terrorist attacks. The Federal Fund target
rate was lowered by 0.25% on June 25, 2003 to
1.00%, the lowest level in 45 years. Concerns
about deflation underlie this low interest rate policy. Any shift in the monetary policy of the U.S.
Federal Reserve Board toward higher interest
rates would depend on a rise in inflation. However,
the insignificant rise in the core consumer priceindex suggests that the low interest rate policy
will be maintained for some time to come.
3.

Economies of Major European Countries(Germany, France, U.K.):
Looking for Recovery(see p. 31 for Figures)This section examines the economic conditionsof three European countries: Germany, France

Development Bank of Japan Research Report/ No.44

1

and the U.K.
The German economy recorded the firstnegative growth in four quarters (real GDP, seasonally adjusted change on the previous year) in
October-December 2002, followed by threestraight quarters of negative growth as imports
increased due to rising oil prices while exports
stagnated as the euro appreciated. It was not until
July-September 2003 that economic growth returned, due to the increase in exports with thestabilization of the exchange rate and recovery inexternal demand following the end of the Iraq
War, as well as by the decline in imports due to
weak domestic demand. However, the momentum of recovery may falter, as the euro has since
set new highs (Figure 1-9).
The French economy turned to positive
growth in January-March 2003 thanks to rising
private demand, only to decline again in
April-June 2003, as personal consumption
slowed and exports stagnated due to the strong
euro. Positive growth returned in July-September
2003 as the euro weakened and domestic demand
recovered (Figure 1-9).
The growth of the U.K. economy accelerated
again in April-June 2003 after slowing down to
0.7% (real GDP, seasonally adjusted change on
the previous year) in January-March. The healthy
growth was maintained in July-September 2003,
pointing to the strength of the U.K. economy ascompared with the other two countries, mainly
due to personal consumption. In addition to thestable employment situation, which will be discussed later, the strong consumption is being fueled by individuals borrowing to benefit from thelow interest rates (Figure 1-9).
Looking at production, the industrial production index (seasonally adjusted, quarterly
annualized) alternates between positive andnegative growth in all three countries (Figure1-10). Recovery in production has been halted
since early 2003 by the successive emergence ofadverse factors such as the euro appreciation,rising oil prices due to the Iraq War and the decline of consumption due to the record-breaking
heat wave this summer. Although business sentiments, as shown by the business survey index,
have been improving in Germany, backed by therecovery of the U.S. economy, those constraints
on production activities undermine the prospect2

Development Bank of Japan Research Report/ No. 44

of a full recovery.
The employment situation can be gauged
from the unemployment rate (ILO standards, seasonally adjusted). In Germany, the unemployment
rate has been rising since the beginning of 2003
mainly due to the reduction in corporate production, reaching 9.42% in April 2003, the highest
level since April 1998. Likewise, unemployment
in France rose gradually in 2003 to reach 9.51% in
September, equaling the level of April 2000. In
contrast, the unemployment rate in the U.K. has
declined consistently since 1993 thanks to deregulation and other measures to increase theflexibility of the labor market. Recently, it has
been stable at around 5.0% (Figure 1-11).
Price inflation in the euro area has beenslightly higher than the reference value (up 2%
from the previous year) of the European Central
Bank since the start of 2003. Jean-Claude Trichet,the new ECB President, is likely to leave the official interest rate unchanged for the moment. In the
U.K., however, the Bank of England raised the official interest rate for the first time in 45 months in
November 2003 (from 3.5% to 3.75%) to dampen
the appetite for personal loans (Figure 1-12).
4.

Economies of Major Asian Countries(Korea, Taiwan, Singapore):
From Slowdown to Upturn(see p. 32 for Figures)This section provides an overview of the Korean,
Taiwanese and Singaporean economies.
In Korea, sudden curbs on private consumption suppressed economic growth in January-March 2003. The downturn in private consumption was triggered by checks on personalloans by financial institutions. As concerns grew
about the excessive debts of credit card users andthe increase in debtors with bad credit standing,the government ordered financial institutions totighten credit risk management on personal loans.
In addition to the slump in personal consumption,
reduced exports due to the outbreak of SARS (severe acute respiratory syndrome) and the strike ofcargo workers led to a further slowdown in economic growth in April-June 2003 (Figure 1-13).
The Taiwanese economy turned to a slightly
negative growth in April-June 2003. Private
consumption, which accounts for 60% of GDP,

declined as individuals refrained from going out
due to the SARS outbreak. There was also anegative impact from fixed asset formation, as
some of the planned construction projects andinvestments in plant and equipment have been
postponed. The economy bounced back in
July-September 2003, however, as fears over
SARS subsided and exports soared with the expansion of the U.S. economy (Figure 1-13).
As in the case of Taiwan, Singapore’s economy also suffered negative growth in April-June
2003. Private plant and equipment investment
fell sharply due to uncertainties raised by the
SARS epidemic, leading to a decline in fixed
asset formation. Private consumption and service
exports also slumped due to the adverse effect onservice industries including hotels and restaurants.
Positive
growthreturnedin
July-September 2003 as exports increased particularly in electronics and electric machinery
backed by the booming U.S. economy and the
expansion of global IT demand. The recovery is
also supported by strong pharmaceutical exports
to Europe and the upturn in private consumption
in reaction to the extraordinarily weak performance in the previous quarter (Figure 1-13).
The industrial production index indicatesthat production activities in Korea continued toslump in July-September 2003 even after the
SARS epidemic had subsided, as exports slowed
due to the prolonged strike by cargo workers. In
Taiwan and Singapore, production declined in
April-June 2003 mainly due to the impact of
SARS, but almost regained the previous level in
July-September 2003 thanks to the recovery inexports backed by the expansion of economies
overseas (Figure 1-14).
Prices have risen slightly in Korea, continued to decline in Taiwan, and remained almost
unchanged in Singapore (Figure 1-15).
5.

China: Resuming Rapid Growth with
Limited Impact of SARS
(see p. 33 for Figures)

Although the Chinese economy experienced socio-economic disruption in the first half of 2003
due to SARS outbreak, it grew rapidly in
July-September 2003, with real GDP growthreaching 9.1% (Figure 1-16).

Strong fixed asset formation and private consumption underlie this rapid growth. Thanks to thecapital construction and real estate investments
led by the government, cumulative fixed asset
formation in January-September 2003 recorded a
substantial increase of 30.5% on the previous year
(Figure 1-17). Private consumption slowed temporarily in May due to the outbreak of SARS, but
this had only limited impact. On the back ofstrong consumer confidence, private consumption
has consistently increased by about 9% on theprevious year since June (Figure 1-18).
As regards trade, exports have grownstrongly since last year, led by electric machineryand textiles, rising about 30% on the previous
year. Imports increased sharply in January 2003
due to tariff reductions, and again from
April-June 2003, attesting to the increasingly
strong linkage of the country with the world
economy. In October 2003, China posted thelargest trade surplus ever, backed by the buoyant
exports (Figure 1-19).
The emergence of China in the world
economy has fueled demands to revalue the Rmb
upward from the U.S., with which China maintains a sizable trade surplus. This led to the expectation that the Rmb will be upvalued, which
would stimulate the inflow of capital from overseas. Meanwhile, investment in fixed asset formation is partly financed by bank loans. The
amount of outstanding bank loans has risen rapidly as a result of the government actively encouraging investment. The inflow of foreign
capital and the increase in bank lending have led
to the rapid growth of money stock (Figure1-20).
Due to active investment from overseas, thereal estate leasing market has been tightened in
the coastal urban areas, causing domestic andforeign investors to focus investments on realestate, thus pushing up real estate prices. Consumer prices fell until 2002, due to oversupply
resulting from increased investment, but rose in
the latter half of 2003. Concerned about theprospect of inflation, the People’s Bank of Chinaraised the deposit reserve requirement ratio from
6% to 7% in September 2003. Consumer prices
in October 2003 reached the highest level since
the autumn of 1997, which led to warnings of theeconomy overheating (Figure 1-21).

Development Bank of Japan Research Report/ No.44

3

II Japanese Economy: FromStandstill to Slight Recovery
1.

Sustainability of Domestic and Overseas“Digital Boom” Holds the Key toFurther Recovery(see p. 34 for Figures)

In fiscal 2003, the Japanese economy recovered
slightly from a standstill in the second half of last
fiscal year. As worries subsided about the Iraq
War, SARS and falling share pries, recovery inplant and equipment investment was confirmed,
led by digital household electronic appliances.
Prospects for exports and production have alsobrightened with the recovery of the U.S. andAsian economies.
Real GDP1 (Figure 2-1) turned up in January-March 2002,2 followed by seven consecutive
quarters of positive growth to July-September
2003. Looking more closely at the growth rateduring this period (referring to seasonally adjusted, quarterly annualized rate for the purposeof this section unless specified otherwise), real
GDP growth recovered quickly in the first half of
FY2002 backed by increased exports and thecompletion of inventory adjustment,3 exceeding
5% in July-September, when consumption accelerated temporarily. In the second half of the fiscal year, however, the growth stalled at around
1% as the contribution from inventories disappeared. Demand also leveled off following
slowdowns in overseas economies due to theimpact of the Iraq War and SARS and as shareprices declined. In 2003, plant and equipment
investment strengthened particularly in digitalhousehold electronic appliances as the negative
1

The following description is based on the “Quarterly Estimates of GDP: Jul.-Sep., 2003 (the 1st Preliminary Estimates).” Subsequently, the data were subject to substantial
revisions with the publication of the actual figures for fiscal
2002 and the 2nd preliminary estimates for Jul.-Sep. 2003.
2
January 2002 is tentatively defined as the most recent
trough.
3
Positive contribution from slower reduction in inventories.
With the revision to the method of calculating quarterly
GDP estimates (August 2002), fluctuations in private inventories have become substantially larger than in the traditional method. Since April-June 2002, inventories havemade a substantially positive contribution due to buildup
following the bottoming-out of the economy.
4

Development Bank of Japan Research Report/ No. 44

impact of the Iraq War and SARS diminishedand share prices rose. In April-June 2003, real
GDP growth reached 3.5% (4.1% excluding thecontribution of change in inventories), the largest
increase in the current recovery phase. Although
the growth declined to 2.2% in July-September
due to slowdown in plant and equipment investment, some favorable developments including
the recovery in exports suggest that the Japanese
economy has got moving again after sluggishness since the second half of last fiscal year, andis recovering slowly led by exports and plant andequipment investment.
Looking at the trend of each GDP (GDE)
component, consumption remains weak despitesome signs of recovery in income and employment conditions. In July-September 2002, real
private consumption recorded a substantial
growth of over 5% from the previous quarter onan annual basis as compensation of employees
bottomed out and consumer confidence improved. In the second half of fiscal 2002, however, consumption leveled off due to the uncertain economic outlook and falling share prices.
Although consumer confidence has returned infiscal 2003 with expectations for improvement inincome and employment conditions, this has notrestored actual consumption. As a result, real
private consumption stayed almost unchanged in
the past 12 months, as shown by the year-on-yearincrease of only 0.2% in July-September 2003 (adecrease of 0.1% in household consumption excluding imputed rent). Any recovery in consumption would require widespread improvement in income and employment conditions.
However, real compensation of employees inJuly-September 2003 decreased from the previous period for the first time in five quarters.
Plant and equipment investment has increased, with the leading indicators holding
steady. Real private plant and equipment investment is showing a healthy recovery in general,
increasing for five consecutive quarters since
July-September 2002, backed by the recovery inproduction, which has led to strong corporate
profits. Largely due to the cautious attitude ofbusinesses, the recovery in plant and equipment
investment initially lagged slightly behind theincrease in exports. Since the beginning of fiscal
2003, however, active investment, particularly indigital household electronic appliances, has led
the growth of GDP. By July-September 2003,
plant and equipment investment had surpassed
the peak recorded in the IT boom era (October-December 2000), 4 which implies that thesustainability of the recovery will depend on
further improvement in production and corporate
profits. As consumption shows little resiliency,
attention should be focused on the developmentof domestic and foreign demand for digitalequipment, as well as on overall exports and theexchange rate.
Residential investment remains low. Realprivate residential investment has been fallingslightly since fiscal 2001. In July-September
2003, it rose by as much as 11.4% from the previous quarter, thus recording the firstyear-on-year increase in 10 quarters. Weakness
prevails however, for this sudden movement
represents
eleventh-hourdemandforowner-occupied houses before the current housing loan tax break ends and in view of rising
long-term interest rates.
Public investment is still falling, reflecting
the financial difficulties faced by central and local governments. Real public investment has declined for six consecutive quarters toJuly-September 2003. Year-on-year change,
which evens out short-term fluctuations, indicates a continued decline since October-December 1999 (except for January-March
2001 when it was flat). The decline accelerated
to double digits in 2003. Public investment now
only accounts for 5% of GDP (nominal basis),which is expected to decline further, given thecontinuation of structural reforms and financial
difficulties.
Exports are recovering, and real exports
have recovered rapidly to lead the Japanese
economy since early 2002 with the progress of
IT-related inventory adjustment in Asia and thesuccess of monetary easing policy in the U.S.
Following a respite in rapid growth that started in
the second half of 2002, due to the disappearanceof the IT-related inventory factor and the slowdown in the global economy induced by the Iraq
War and SARS, real exports posted a dou4

Seasonally adjusted real value. The same is true whenmeasured as a percentage of GDP.

ble-digit increase from the previous period in
July-September 2003, after three quarters ofslowed growth. Exports particularly increased to
the U.S., which experienced rapid economic
growth largely thanks to the tax reduction, as
well as to China, which overcame the impact of
SARS. The world economy is likely to continue
its recovery for some time, led by the U.S. andChina. However, concerns persist about adverse
factors such as the reaction to economic stimulus
measures and the growing trade deficit in the
U.S., and excess liquidity and reaction to economic overheating in China, as well as the troubles in Iraq and the risk of SARS re-emerging.
Imports are rising gently. As production
activity came to a standstill, real imports began
to slow in the second half of 2002, recording thefirst decline in six quarters in April-June 2003,
but increasing in July-September. Imports are
expected to continue to grow, with the progressin international division of labor in East Asia
serving as a structural factor.
Thanks to the strong movement in the first
half, real GDP growth for fiscal 2003 will reach
2.2% even if the year-on-year growth stays unchanged on the previous year in the remaining
two quarters. Thus, the second consecutive yearof positive growth is almost ensured, as well as
the realization of the forecast in the government’s Economic Outlook (up 0.6% in realterms). 5 Many of the recently published estimates forecast a positive growth in the 2%
range. 6 Thus, the Cabinet Office Estimates in
September suggest an increase of 2.1% in realterms,7 while the majority of the policy board
members forecast a growth of 2.3-2.6% in the
Bank of Japan Outlook Report for October.8
Recently, however, real GDP tends to be
estimated higher than in the past due to technicalreasons such as the introduction of a new method
5

Cabinet Office, “Fiscal 2003 Economic Outlook and Basic Stance toward Economic and Fiscal Policy” (Cabinet
Decision on January 24, 2003).
6
The average of real economic growth forecasts for fiscal
2003 by 14 private forecast institutions based on the quarterly GDP estimate for July-September 2003 = up 2.6%
(Nihon Keizai Shimbun, November 21, 2003).
7
Cabinet Office, “Fiscal 2003 Economic Trend Estimates(Cabinet Office Estimates)” (September 26, 2003).
8
Bank of Japan, “Outlook and Risk Assessment of the
Economy and Prices (October 2003),” (November 4, 2003).
Development Bank of Japan Research Report/ No.44

5

of estimating quarterly GDP. Some note thatsuch estimates need to be discounted when used
as an indicator of improvement in the supply-demand gap. 9 The overestimation of real
growth rate (hence, overestimation of decline in
the deflator) is due mainly to two reasons:(1) With the adoption of the corporate goods
price index (2000 as base year) as basic statistics,10 the decline in the deflator due toadjustments for quality (application of thehedonic method) has been magnified, particularly in IT-related capital goods.
(2) As the base year for national accounts(1995) recedes in time, the downward biasof the deflator, a Paasche price index,11 has
become greater.
Indeed, on a graph showing real GDP on thehorizontal axis and its deflator on the verticalaxis (Figure 2-2), the following can be observed
since the recession following the peak ofApril-June 1997:(1) The deflator continued to decline even in
economic expansion periods at a pace fasterthan in recessions, when the weight of plantand equipment investment is reduced.
(2) The deflator is falling faster during the current economic expansion (more remote fromthe base year) than in the similar expansion
period around 2000.
As can be seen in the conceptual diagram,simultaneous progress in the expansion of output(real GDP) and decline in prices (deflator) implies the strength of deflationary pressure causedby the rightward shift of the aggregate supply
curve. In this case, “deflationary pressure” includes technological progress expressed as qual9

See BOX in the “Outlook Report” (Note 6) for example.
Although it is difficult to measure the extent to which real
GDP is overestimated as compared with the traditional
method, it would be reasonable to assume the gap to bearound 1%. Indeed, the Outlook Report based on the traditional method said that any improvement in the supply-demand gap requires a real GDP growth in the 1%
range, while maintaining that the growth estimated by the
majority of the policy board members (ranging from 2.3%
to 2.6% based on the new method) will not be enough todissipate deflationary pressure.
10
This method is now applied retrospectively, back to
January-March 2001.
11
In general, a Paasche price index is affected by downward bias when heavy weights are given to products such as
IT-related goods, for which decline in prices and increase involume occur simultaneously.
6

Development Bank of Japan Research Report/ No. 44

ity adjustment and the impact of the downward
bias inherent in a Paasche index.
As the limit of statistics becomes clear, dataneed to be checked against multiple indicators. In
this light, supplementary information should be
provided regarding nominal GDP and its trend by
demand item. Since falling below ¥500 trillion for
the first time in six and a half years in October-December 2001, nominal GDP (seasonallyadjusted) has remained low with some fluctuations. Nominal private consumption has declined
slightly for four straight quarters toJuly-September 2003. Nominal GDP and nominal
private consumption both declined on the previous
year in July-September 2003. As shown in Figure
2-3, nominal private plant and equipment investment is characterized by a significant decline in
the deflator (falling 7.2% on the previous year in
July-September 2003), with substantial divergence from the real value. Although the nominal
value has increased for five consecutive quarters
since July-September 2003, it only rose 6.0% on
the previous year in July-September 2003 while
the real value increased 14.2%. Thus, most of theincrement in the real value may be explained by
the decline in the deflator.
A comparison between the government’s
Economic Outlook in January 2003 and the
Cabinet Office Estimates in September 2003
confirms this point. The difference between thetwo regarding real economic growth for FY2003
is as large as 1.5% (+0.6% in the former and+2.1% in the latter) while the difference in theforecast of nominal growth rate is only 0.3%(-0.2% in the former and +0.1% in the latter) although there is a difference in the direction(positive or negative). In other words, the change
in the forecast of real growth rate during theeight-month period12 largely reflects the fact thatthe deflator declined faster than expected. Private
research institutions also concur that nominal
growth will be near zero.13
12
Although the Cabinet Office Estimates are not published
as revisions to the government’s Economic Outlook, thisreport considers that they represent a change in views contained in representative estimates published by official bodies. The BOJ Outlook Report does not provide any estimates by policy board members on nominal growth rate.
13
The average of nominal economic growth forecasts forfiscal 2003 by 14 private forecast institutions based on thequarterly GDP estimate for July-September 2003 = up 0.0%

2.

Production Recovering after Temporary Standstill(see p. 35 for Figures)

To confirm from the supply side the trend of
GDP identified in the previous section, thischapter looks at the trends of key components forthe index of all-industry activity: the industrial
production index (2000 as base year, 22.4%
weighting in 1995), the tertiary industry activity
index (1995 as base year, 59.5% weighting in
1995) and the construction activity index (1995
as base year, 8.1% weighting in 1995) (Figure
2-4, seasonally adjusted).
With the progress of inventory adjustment
in IT-related products, the industrial production
index rose in January-March 2002, and recovered strongly until July-September led by theelectronic device industry (semiconductors andliquid crystal elements for portable phones anddigital cameras in particular) and the transport
equipment industry (standard-sized cars for export and small cars for the domestic market). In
October-December, the index leveled off in electronic devices as inventories increased slightly.
The recovery of production halted for the wholeindustrial and mining sector in January-March
2003, as production slowed down in transport
equipment due to the stagnation of overseas
economies and a respite in the effect of newmodel marketing. Although the two industries
experienced a slight recovery in the following
April-June period, production declined in theother industries reflecting the sluggish growth of
final demand. Thus, the index declined for the
first time in six quarters for the whole industrial
and mining sector, raising an unusual concernthat inventories might enter an adjustment phaseat a low level.
This downtrend continued into August. In
September, however, the production index increased by 3.8% from the previous month led byelectronic devices and related manufacturing
equipment. Thus, the index surpassed the mostrecent monthly and quarterly peaks in September
and in July-September, respectively. The Manufacturing Production Forecast Survey projects
large production increases in October and No(Nihon Keizai Shimbun, November 21, 2003).

vember, particularly in electronic devices andrelated manufacturing equipment. If such growthmaterializes, the average industrial production
index for October and November will exceedthat for July-September by more than 6%. Even
though the Forecast Survey tends to be revisedslightly downward in actual figures, production
is clearly recovering.
The tertiary industry activity index bottomed out in April-June 2002, rising for the firsttime in five quarters. Its recovery has been weak,
however, with mixed performance in individual
industries. Thus, the index stayed almost flat until January-March 2003, moving within a narrow
range between 106.1 and 106.6. Although it has
risen somewhat, exceeding 107 for two consecutive quarters since April-June with increases recorded in many of the months, it remains almost
unchanged excluding the significant contributionof finance/insurance thanks to the recovery inshare prices and the effect of monetary policies.14
The relatively active service sector holds the key
to future improvement, and it will be interesting
to note the extent to which services will benefit
from the ongoing recovery in the corporate sector.
The construction activity index is falling
further in FY2003, after holding steady throughout FY2002. Related statistics suggest that this isdue to further reduction in public works, although private construction activity is bottoming
out.
Figure 2-5 shows developments in the inventory cycle, an important factor in forecasting
future business conditions.15 The inventory cycle
14
The activity index for finance/insurance also covers theactivities of the BOJ and other public financial institutions.
15
In a graph with the year-on-year growth of inventories
plotted on the abscissa and that of shipments on the ordinate,
the inventory levels are empirically known to move inclockwise circles (see Figure 2-5, Concept). In other words,
although producers try to adjust production to match shipment volume, the time lag between noticing a change inshipment growth in line with the economic cycle and thesubsequent adjustment of production volume causes swings
in the inventory level.
For example, when shipments grow as the economy
expands, producers intentionally build up inventories by
increasing production so as not to miss opportunities forprofit (intentional buildup phase). However, the economy
will eventually pass its peak and the growth in inventories
will exceed the growth in shipments (crossing the 45°line in
the first quadrant from upper left to lower right). This means

Development Bank of Japan Research Report/ No.44

7

entered a recovery phase in April-June 2002 andan intentional buildup phase in July-September.
Subsequently, production was swiftly adjusted toshipments (≒demand), which continued to show
little improvement. As a result, the inventory
cycle is approaching the 45°line while inventories are staying below the previous year (crossing
the 45°line from upper left to lower right would
be a sign of recession). However, monthly data
since July indicate an upward movement in September. In light of index forecasts for Octoberand November, it is possible that shipments will
increase and inventories decrease again following a respite as was observed in 1995-96.
The recovery in production from September
to November may be explained by the anticipation of a world-wide growth of the digitalhousehold electronic appliance market, recovery
in IT investment mainly in the U.S. and demand
for related plant and equipment investment.
Some even argue that the recovery owes much to
anticipatory demand or stampede based on
over-expectation, although this would not becomparable in scale with the IT boom in 2000.
Negative effects may appear in early 2004, if thegrowth in demand does not meet the planned increase in production. For the moment, theChristmas sales campaign in the U.S. and theyear-end sales campaign in Japan will serve as atest of the sustainability of the “digital boom,”which holds the key to forecasting macroeconomic developments in the months ahead.16
In the economic recovery phase leading tothat inventories, despite the efforts of producers, continue toincrease above a reasonable level (unintended accumulation
phase). Further recession, causing decreases in shipments,
forces producers to cut back production faster than the decline in shipments until inventories fall to a reasonable level(inventory adjustment phase). The economy subsequently
bottoms out and shipments start to recover. However, inventories will then be decreasing faster than shipments(crossing the 45°line in the third quadrant from lower rightto upper left). This means that producers unintentionallyreduce inventories (recovery phase). Once producers realizethat inventories have fallen below the suitable level, production will again start to be increased. This creates theinventory cycle consisting of the above four phases.
16
However, expenditures for digital household electronic
appliances might be increased to the detriment of other expenditures, as was observed in the pattern of domestic consumption when charges for portable phone calls rose rapidly.
In this sense, the impact of the digital boom needs to beconsidered in its entirety.
8

Development Bank of Japan Research Report/ No. 44

the peak in April-June 1997 (see Reference inFigure 2-5), the recovery process after the temporary standstill lasted only about a year, eventhough this was largely due to the negative impact of the consumption tax hike. Views diverge
on the duration of any recovery following thecurrent mini-adjustment phase, but the inventory
cycle is already at a considerably mature phase(near the first quadrant) and no industries are in aposition to lead the recovery apart from
IT-related ones. Therefore, any negative impact
at this stage is likely to cause recession. As regards fiscal 2004, the majority forecast is slower
growth in the second half mainly due to a slowdown in the U.S. economy, as the initial effect of
the tax reduction will disappear.17
3.

Harsh Employment Situation,
but Improving(see p. 36 for Figures)

The ratio of active job openings to applicants has
been rising since the bottom of 0.51 in January-March 2002, but only slowly (Figure 2-6).
This is because the denominator of the ratio (i.e.
the number of job seekers) has stayed high despite the rising numerator (i.e. the number of job
offers).
The unemployment rate remains around 5%,with the number of unemployed persons reachinga record high of 3.85 million in April 2003. By
age group (Figure 2-7), unemployment is particularly high among those aged 15-24, whichindicates fewer job opportunities for young people as companies curtail new hiring.
The number of employees is recovering in
general, despite recording a slight decline on theprevious year in July-September 2003 following
an upturn in April-June (Figure 2-8(1)). By industrial sector,18 services continue to lead the17
The average of real economic growth forecasts for fiscal
2004 by 14 private forecast institutions based on the quarterly GDP estimate for July-September 2003 = up 2.0%.
The average of nominal economic growth for 2004 by thesame institutions = -0.1% (Nihon Keizai Shimbun, November 21, 2003). On a calendar year basis, IMF forecasts a
slowdown from +2.0% to +1.4%, and OECD from +2.7% to+1.8% (change in real growth rate from CY2003 to
CY2004).
18
Based on the new industrial classification (revised in
March 2002).

growth of employment as the decline in manufacturing and wholesale and retail trade has beenslowing. 19 Looking at the different employee
classifications, the rise in temporary and daily
employees has been slowing,20 while the reduction in self-employed and family workers hascome to a halt. The number of regular employees
is also bottoming out (Figure 1-8(2)). By size ofcorporation, the number of employees in large
corporations that employ 500 or more workers,
which had declined substantially since the second half of 2002, rose in 2003 and boosted thetotal number of employees (Figure 1-8(3)).
Meanwhile, the number of employees in corporations that employ less than 500 workers has
been falling, possibly reflecting the difference inthe pace of corporate profit improvement.21
Overtime hours have been increasing steadily
after reaching a low in October-December 2001
(Figure 2-9), particularly in the manufacturingsector where overtime hours in July-September
2003 surpassed the values reached during therecent two peaks22 in the economic cycle. The
rise in overtime hours raises expectations forfurther recovery in employment, but pressure forcorporate structural adjustment remains strong.
The recovery in employment will continue to be
weak.23

19

Looking at the service sector in detail, medical care andwelfare are leading the increase in employment. See DBJ,
“Trend of Employment in Medical Care and Welfare: Driving Force of Job Recovery,” Monthly Economic Notes, October 2003.
20
Temporary and daily employees refer to those hired for aperiod of one year or less, and regular employees refer to
executives and those hired for a period of over one year orfor an undetermined period. The slowdown in the growth of
temporary and daily employees also contributed to the bottoming out of wages and salaries through a respite in theshift from regular to part-time employment.
21
For earnings performance by size of corporation, see
Cabinet Office, “Annual Report on the Japanese Economy
and Public Finance 2003,” Section 1-1.
22
April-June 1997 and October-December 2000 (provisional) on a quarterly basis. The amount of overtime hours
also peaked in those periods.
23
It has been noted in recent years that it takes longer for
an increase in overtime hours to result in an increase inemployment. See Ministry of Health, Labour and Welfare,“White Paper on Labour 2003,” Section 1-3.

4.

Wages Bottoming Out, Consumer
Confidence Improving(see pp. 37-38 for Figures)

The year-on-year change in total cash earnings
per person based on the Monthly Labor Survey
indicates that wages have been flat since
July-September 2002 (Figure 2-10). In more detail, overtime pay continues to rise on the previous year with the increase in overtime hours.24
Meanwhile, the decrease in regular wages andsalaries and in bonus and special earnings has
been slowing, as wages and salaries are bottoming out for both full-time and part-time workers.
Also, changes in the composition of theworkforce, i.e. shift from full-time to part-time
employment, have eased.25
Bonuses are also bottoming out (Figure2-11). The summer bonus for 2003 increased forthe first time in three years, after witnessing thelargest drop since 1991, for which comparable
data are available. Since bonuses tend to reflect
corporate profits, the increase is the result of improving corporate performance, particularly forlarge manufacturers. The winter bonus for 2003
is expected to show a similar trend of bottoming
out thanks to continued improvement in corporate profits and as many companies have adopted
the so-called comprehensive “summer-winter”
bonus system, in which both the summer andwinter bonuses for the year are determined during the spring wage negotiation.26
Against this backdrop, real private final
consumption according to the GDP estimate has
shown little quarter-to-quarter movement (Figure2-12). Consumption based on the GDP estimate
necessarily diverges from consumption based on
the Family Income and Expenditure Survey due
to such factors as the rise resulting from the increase in population and number of households,
24
However, the increase in overtime pay has not kept pacewith the increase in overtime hours.
25
See DBJ, “Bottoming out of wages and regular wages
and salaries,” Monthly Economic Notes, November 2003.
Part-time workers receive just over 20% of the wages
earned by full-time workers, in part due to the difference inhours worked.
26
According to the Ministry of Health, Labour and Welfare,“Settlements on the 2003 Summer Bonus in Selected Private Enterprises,” almost 70% of the companies haveadopted the comprehensive summer-winter bonus system.

Development Bank of Japan Research Report/ No.44

9

as well as the inclusion of imputed rent. In fact,
the real consumption of worker’s households inthe Family Income and Expenditure Survey continues to decline on the previous year (Figure2-13). This trend can be broken down into threecomponents: income, non-consumption expenditure (e.g. tax payments and social insurance
premiums) and consumption propensity. Downward pressure on consumption from the decline
in income has been weakening since January-March 2003, reflecting the bottoming out ofwages. Meanwhile, the rise of consumption propensity, which has propped up consumption
since the second half of 2002, has weakened recently.27
On the supply side, the retail sales index(Figure 2-14) is still declining, especially for
products such as clothing, food and beverages as
the sales of seasonal products slumped due to theunusually cool summer. Among home appliances,sales are buoyant for DVD players and TV setswith liquid crystal, plasma and other flat-panel
displays. PC sales have also been recovering recently.28 Overall sales are still in a slump, however, largely due to the cool summer, which affected the sales of air-conditioners.
The number of passenger car sales rose substantially in January-March 2003 due to a surge
in demand before the change in environment-related taxation schemes in April 2003,
which reduced the tax relief applicable tolow-pollution vehicles (Figure 2-15). In reaction,
sales plummeted in April-June, followed by afurther slump as demand for small cars leveled
off after leading the sales increase in 2002.
Looking at the year-on-year trend of tourism
sales (Figure 2-16), overseas travel rose substantially in the second half of 2002 in reaction to thedecline following the terrorist attacks in the U.S.
a year earlier. In 2003, however, sales of overseas travel plunged again due to the Iraq war andthe SARS epidemic mainly in Asia, recording asteeper decline in April-June 2003 than in October-December 2001, when the impact of the ter27

However, this development has much to do with sampling changes. See DBJ Research Report No. 36, “Recent
Trends in the Japanese Economy,” 2003.
28
The recovery may have been closely related to thelast-minute demand before the introduction of the home PC
recycling scheme in October 2003, which requires that therecycling cost be added to sales prices.
10

Development Bank of Japan Research Report/ No. 44

rorist attacks was felt. Although overseas travel
has been recovering gradually since the end of
the Iraq War and the SARS epidemic, sales continue to decline. Meanwhile, sales of domestic
tours have been rising partly due to a shift fromoverseas travel. Also, the downtrend in the unit
price per customer has halted, as indicated by thestatistics on brand sales by travel agencies.
Finally, consumer sentiment is showing
signs of recovery, although with variations inindividual indicators (Figure 2-17). The Living
Insecurity Index has been flat, while the Nikkei
Consumption Forecast Index has been deteriorating as consumers are less willing to spend on
travel, recreation and durable goods. In contrast,
the Consumer Confidence Index for the coming
six months has improved for two quarters running. Prospects are improving in virtually all aspects, particularly in employment and income,reflecting expectations of economic recovery. It
is worth monitoring the extent to which the bottoming out of employment and income conditions will stimulate consumption.
5. Plant and Equipment Investment In-

creasing, but Ratio to Cash Flow
Still Subdued(see p. 39 for Figures)
Plant and equipment investment is increasing,led by the manufacturing sector, while leading
indicators continue to show strength in general.
However, its ratio to cash flow indicates the persistenceofselective
investment.
Thesustainability of improvement in corporate profits is the key to the future growth of plant andequipment investment.
According to the Statistical Survey of Incorporated Enterprises (Figure 2-18), nominal
plant and equipment investment in April-June
2003 increased on the previous year for the firsttime in seven quarters.29 Plant and equipment
investment in the manufacturing sector is em29

In the Statistical Survey of Incorporated Enterprises,“Plant and Equipment Investment Including Software” hasbeen taken as the official amount for plant and equipment
investment since July-September 2001, but time series data
before this period are unavailable. Therefore, analyses inthis research report use the “Plant and Equipment Investment Excluding Software” figures.

pirically known to have a strong correlation withreturn on investment30 with some time lag. Indeed, the recovery in plant and equipment investment became clear in late 2002, following
the improvement in return on investment since
early 2002. In April-June 2003, investment increased for the first time in two years, up 3.8%
on a year earlier. Although return on investmentin the manufacturing sector eased in the first halfof 2003, several surveys on revisions to plant andequipment investment plans for FY2003, conducted in August and September, indicate ahealthy increase not only in large-scale manufacturers (the third plot from the left), whichhave led plant and equipment investment since
the initial stage of recovery, but also in small
manufacturers (the second plot from the left),which had seemed slow to recover. This trend iscomparable with the revisions in FY2000, theprevious peak of plant and equipment investment.
It is therefore considered that plant and equipment investment in the manufacturing sector willremain strong for the rest of the fiscal year, as
long as return on investment holds steady. In the
non-manufacturing sector, on the other hand,plant and equipment investment recorded a substantial increase of 7.7% on the previous year in
April-June 2003. This improvement may be
short-lived, as it owes much to extraordinary increases in real estate and in some services. Annual investment plans of large-sized firms stillsuggest cautiousness, particularly in industries
under heavy pressure to reduce cost due to deregulation. Moreover, the future trend of investment by small firms remains uncertain, and it is
impossible to judge the sustainability of plantand equipment investment in the non-manufacturing sector.
The ratio of plant and equipment investment
to cash flow31 (Figure 2-20), a measure of cor30

For the purpose of this section, return on investment isdefined as operating asset profit rate (the ratio of seasonallyadjusted operating profit to the sum of tangible fix assets
and inventories, which represents the profitability of operating assets) minus interest cost (the average contracted
interest rates on new loans). Interest cost has been stable ata low level in recent years. Operating assets, or the denominator of the operating asset profit rate, do not fluctuate
widely in the short term. Therefore, the trend of return on
investment is basically explained by the change in operating
profit.
31
Although cash flow may be defined as the sum of af-

porate propensity to invest in plant and equipment, has been declining in both the manufacturing and non-manufacturing sector, standing at
60% in manufacturing and 70% in
non-manufacturing according to the most recent
data. This rate may rise in the short-term in the
manufacturing sector, as plant and equipment
investment recovery tends to lag behind improvement in profit. Even if allowance is madefor this tendency, however, investment in all industries remains highly selective. Generally
speaking, the fact that plant and equipment investment stays within cash flow means that thecorporate sector has excess savings. The current
high level of excess savings, although unusual indeveloped economies, is expected to continue forsome time, because average companies urgently
need to improve the slumping return on capitaland remedy their financial weakness as thegrowth rate is expected to stay low and the relative price of capital goods is continuing to decline.32
Thus, the current recovery in plant andequipment investment so far has stayed within
the limit of a “subdued cyclical recovery phase
led by the manufacturing sector.” New signs ofchange can be observed in capital stock, however.
The growth of capital stock usually rises following a recovery in plant and equipment investment.
In the current recovery, capital stock in the
manufacturing sector (Figure 2-21) declined forthe first time in April-June 2003, as far as comparable data are available. This is a result of a
rapid rise in the retirement rate 33 despite inter-tax profit and cost depreciation, this report simplifies thecalculating procedure by regarding ordinary profits/2 asafter-tax profit, due to constraints on data presented in the
Quarterly Report of Statistical Survey of Incorporated Enterprises. The figures used in this report are different fromcash flow in a strict sense in that using accounting profit forcalculation entails the impact of gains or losses that do not
result from actual cash flow, such as profit or loss fromvaluation and cost allocations.
32
The excess savings may fade gradually after the debt
overhang has been cleared. However, this will take the formof increased dividends rather than increased plant andequipment investment, if the expected growth rate of theJapanese economy does not improve substantially in thenear future.
33
By definition, capital stock at current term end = capitalstock at previous term end + (new investment – grossretirement + acquisition of used goods) in the current term.
“Net retirement” shown in Figure 2-21 represents grossDevelopment Bank of Japan Research Report/ No.44

11

creased plant and equipment investment. Even
though this sudden movement seemingly
includes a temporary fluctuation, it also suggeststhat the so-called “business reconstruction” isunderway, including the reduction of excess capacity and withdrawals from unprofitable businesses.34 If the accumulation of capital stock inthe current stage is smaller than in the past, stock
adjustment in the next recession may turn out tobe milder.
6. Leading Indicators Showing Strength,

Attention Focused on Corporate Profits(see p. 40 for Figures)
Machinery orders (domestic private demand excluding ships and electric power), a good leading
indicator of plant and equipment investment(particularly of nominal investment in machinery), have increased on the previous year since
January-March 2003, after hitting the bottom in
January-March 2002 (Figure 2-22). The growthslowed in July-September, as orders from theelectric machinery industry became flat. However, the Forecast of Machinery Orders for October-December, 35 published in September, indicates acceleration as a whole thanks to a substantial increase in orders from thenon-manufacturing sector, although orders fromthe manufacturing sector will show a slight
slowdown (decline on the previous quarter) for
the second consecutive quarter.
Since machinery orders are usually supposed to lead plant and equipment investment by
a quarter or two, plant and equipment investment

will remain brisk until the first half of 2004.
However, the reliability of the forecast based onmachinery orders has been reduced somewhat for
two reasons. First, a comparison of machineryorders with the SNA-based plant and equipment
investment net of estimated construction andsoftware investments,36 which nearly equals investment in machinery, indicates that machineryorders have not served as the leading indicator of
the latter since around 1999 (Figure 2-22). Since
the recession phase in 2001, the two have fluctuated almost simultaneously. Although it is too
early to draw a conclusion, any structuralchanges would be due to the rising weight of IT
investment with a shorter time to build (fromreceiving order to installation).37 Second, data
appearing in the Orders Received for Machinery,
particularly from the telecommunications industry or the non-manufacturing sector as a whole,fluctuate with changes in demand for portablephones, which are unrelated to plant and equipment investment. 38 This is because portablephones are counted in the statistics according tothe old practice of regarding the acquisition of
telephones as “plant and equipment investment.”
The share of portable phones in the Orders Received for Machinery cannot be estimated without considerably bold assumptions. However, therapid growth of portable phones with camera
function suggests that the recent increase in orders from telecommunications and othernon-manufacturing industries may be highly
overestimated (as a leading indicator of plant andequipment investment).39
36

retirement (usually referred to as retirement) minus acquisition of used goods.
34
According to data from the Quarterly Report of Statistical Survey of Incorporated Enterprises, basic statistics onamortization, the iron and steel industry contributed substantially to the rise in amortization rate in April-June 2003.
35
The Forecast published by the Cabinet Office represents
the simple aggregate of projections by corporations multiplied by the average ratio of achievement (actual
value/simple aggregate value) over the recent three quarters.
Due to the substantial upward movement of the ratio ofachievement in non-manufacturing for January-March andApril-June 2003, however, the Cabinet Office itself admits
that the Forecast for October-December based on the traditional calculation rule is likely to represent an overestimation. This section therefore considers the simple aggregate
as forecast.
12

Development Bank of Japan Research Report/ No. 44

Based on the fixed capital matrix in the 1995
Input-Output Table, plant and equipment investment is divided into construction investment, software investment andother (machinery, etc.) investment. Using those values asbenchmarks, subsequent construction and software investments are estimated with the growth of the non-housing
component in the Integrated Statistics on Construction
Work and the growth of intangible fixed assets in the Gross
Capital Stock of Private Enterprises, respectively.
37
Traditionally, machinery orders were considered to lead
investment by two to three quarters, which is also implied in
the Annual Report of Orders Received of Machinery, published by the Cabinet Office. However, the time lag of one
to two quarters has been cited more often in recent years
due to the “downsizing” of plant and equipment investment.
38
Apparently, this is closely related to the first reason, i.e.
reduced role of machinery orders as a leading indicator.
39
Orders from the telecommunications industry have increased on the previous year since January-March 2003.

Figure 2-22 also shows the floor area of
construction starts (private non-housing), one of
the leading indicators of construction investment,
which has been rising slowly since 2002 withsmall fluctuations. In July-September 2003, thefloor area jumped sharply for the first time in along while, up almost 10% on the previous year.
However, this leading indicator essentially does
not have much forecasting power as machineryorders. Also, the influence of construction investment on the short-term trend of plant andequipment has been reduced considerably in recent periods.
Thus, the general strength of leading indicators is a positive factor for plant and equipment
investment in the months ahead, but is insufficient for making a judgment. This section therefore examines the future trend of corporate profits, which is the most important element among
the fundamentals of plant and equipment investment. Various surveys indicate a second consecutive year of increase in corporate profits forfiscal 2003. In view of the close relationship between return on investment and plant andequipment investment, investor sentiment in thenext fiscal year will depend on whether this projected increase in profits materializes.
Using break-even analysis, the change inoperating profit in the Statistical Survey of Incorporated Enterprises can be broken down as
follows. First, marginal profit ratio40 is calculated back from the formula: ordinary profit ≡sales×marginal profit ratio – fixed cost, with
fixed cost defined as the sum of labor cost anddepreciation cost. Then, the contribution of eachcomponent is calculated as the change in profit,
assuming that the other two components remainunchanged on the previous year. Thus, thechange in ordinary profit on the previous year
can be broken down into three components: increased revenue, marginal profit ratio and fixed
cost (Figure 2-23).41 The result indicates that the
reduction in fixed cost, which has helped increase profits since 2002, is coming to a halt in
However, trends in the Current Survey of Industrial Production indicate that orders other than for portable phones may
have been actually decreasing on the previous year.
40
Also known as margin ratio (= 1 – variable cost/sales).
41
The confounding term (composite factor) is included in
the marginal profit ratio component.

2003, causing the growth of profits to slow.
Planned profits for FY2003 according to the BOJ
Tankan (September survey) show that the reduction in fixed cost almost solely accounts for increased profits in the first half, while the marginal profit ratio accounts for most of theplanned profit increase in the second half, with asubstantial decline in the contribution of the reduction in fixed cost. For those firms whosebusiness year ends in March, the figures for the
first half represent relatively accurate estimates,
while the “planned” figures for the second half
only represent the residuals after subtracting theresults in the first half, assuming that few firms
review their annual plans before the mid-term
account settlement. The above analysis may
therefore not properly reflect corporate attitudes.
Nonetheless, sufficient margins will be required
to achieve the annual plans, in view of the continued tightness in markets and stabilization of
the exchange rate. In this context, the production
outlook for October-December, mentioned in
Section 2, is a favorable factor. The
sustainability of the growth of plant and equipment investment will largely depend on continued strength in production and shipments, whichlead the former by about six months.
7. Weak Residential Investment(see p. 41 for Figures)
Housing starts (seasonally adjusted annual rate)
have been weak since 2001, staying below the
1.1 million mark (Figure 2-24). The year-on-yearchange by component (Figure 2-25) indicatesthat the construction of housing for rent and forsale has held steady, while that ofowner-occupied houses rose in April-June 2003,
after falling on the previous year since 2001.
This is due to the last-minute demand before thetermination of the housing loan tax break42 andthe acceleration of construction starts in anticipation of rising interest rates. Since the effects of
the higher demand will disappear in the second
half, housing starts will continue to slump for the42

Since purchasers have to move into the houses before theend of 2003 to benefit from the tax reduction scheme, thestepped-up demand appeared in the first half of 2003 asincreased housing starts. Discussion is currently underway
to extend the deadline for the scheme.
Development Bank of Japan Research Report/ No.44

13

rest of the fiscal year and beyond.
The floor area of housing starts shows asimilar trend to the units of housing starts (Figure2-26). As can be seen in the movement of housing starts, its leading indicator, real private residential investment (seasonally adjusted annualrate) has continued to fall gradually (Figure2-27).
In the condominium 43 market, stocks accumulated by 2002 both in the Tokyo metropolitan area and Kinki area 44 have been reduced(Figures 2-28 and 2-29). Although this decline
might suggest a rapid growth in condominium
starts in the months ahead, the decline actuallyreflects fewer units marketed due to the postponement of sales.45 Therefore, the decrease instock may not result in an increase in housing
starts for some time to come.
8. Public Investment Falling due to Dif-

ficult Financial Situation(see p. 42 for figures)
Public investment (public capital formation,seasonally adjusted, annualized nominal values)
has declined almost constantly since the latter
half of 1999, due to cuts in expenditures forcedby financial difficulties (Figure 2-30). Consequently, public investment now accounts for only
5.3% of GDP (seasonally adjusted nominal values), down four percentage points from its peak.
Contracted public works orders, a leading
43
For the purpose of this report, the term “condominium”
refers to a subdivided housing lot made of reinforced steel
frames, ferro-concrete or steel frames.
44
The statistics of Building Construction Started include
condominiums in housing for sale. Condominiums accounted for 63.0% of housing for sale in fiscal 2002 (basedon the number of new housing starts). Condominium housing starts in the Tokyo metropolitan area (Saitama Prefecture, Chiba Prefecture, Metropolis of Tokyo, Kanagawa
Prefecture) and Kinki area (Shiga Prefecture, Kyoto Prefecture, Osaka Prefecture, Hyogo Prefecture, Nara Prefecture,
Wakayama Prefecture) account for about three-quarters of
the national total, 75.8% to be exact (FY2002). Therefore,
the trend of the condominium market in these two areas is
an important leading indicator for the construction of condominiums and housing for rent as a whole.
45
The Real Estate Economic Institute calculates the unitsof stock at the end of the current month as the units of stockat the end of the previous month + the units marketed in thecurrent months – the units sold in the current month. Hence,
the units not marketed are not statistically counted as stock.

14

Development Bank of Japan Research Report/ No. 44

indicator, fell 7.2% in fiscal 2002, the fourthstraight year of decline (Figure 2-31). Public
works continue to decline due to spending cuts inline with the budget reform policy of the Koizumi Cabinet. Cutbacks in spending are particularly significant in funds allocated to local regions, which account for 70% of public investment, in the face of the dire financial situation.
The decline in spending accelerated in theinitial budget for fiscal 2003, with proposed reductions from the previous year of 3.7% in central government expenditures on public works
projects and 5.3% in investment expenses underlocal finance plans. According to a document
submitted to the Council of Economic and Fiscal
Policy, central government expenditures on public works projects will be cut by a further 3%, sopublic investment looks set to continue to contract in the years ahead.
While public investment tends to decline,
budget revenue has been slumping due to thesluggish economy and income and other tax reductions, resulting in major budget deficits forboth central and local governments. Since thedeficits have been largely financed by government bond issues and by borrowings in the special account for local allocation tax, outstanding
government debts have ballooned. Indeed, theoutstanding long-term debts of central and local
government will total ¥686 trillion at the end of
fiscal 2003, accounting for some 140% of GDP(Figure 2-32). This trend is continuing, althoughgovernment debts were reduced prima facie atthe end of fiscal 2002, with the abolition of special accounts for postal services and postal savings (outstanding debts of some ¥49 trillion as at
the end of fiscal 2003).
At present, Japan has huge general government debts as compared with other developed
countries, as well as a substantial deficit in the
primary balance, i.e. the budgetary balance excluding bond issues, interest payments and bondredemptions (Figure 2-33). This fiscal position isin stark contrast to the financial restructuring
carried out by the EU and the U.S. since the late
1990s. Although the Koizumi Cabinet had adhered to its commitment to cap new central government bond issues at ¥30 trillion, the supplementary budget for fiscal 2002 resulted in bondissues of some ¥35 trillion, effectively violatingthe commitment. New bond issues of some ¥36trillion are projected in the initial budget for fiscal 2003.
9.

Signs of Recovery in Exports and Mild
Increase in Imports(see p. 43 for Figures)

Figure 2-39 shows the import trend for eachtype of goods. Total imports rose in April-June
2003, as imports of consumer durables and capital goods increased from the U.S. and Asia while
the decline in imports of construction materials
eased.
10.

Figure 2-34 shows the trend of real effective exchange rates of major currencies. The Japanese
yen depreciated to July 2003, but both the yen
and euro have strengthened against the dollar
since September 2003, as effective rates in the
U.S. fell in view of the coming presidential election.
Figure 2-35 compares the yen/dollar exchange rate with the purchasing power parity.
The rate moved upward (i.e. the yen weakened)in 2002 and approached the purchasing power
parity, which continued to decline. In May 2003,
however, the rate again started to diverge fromthe purchasing power parity, as the yen
strengthened following the G8 joint statementand due to increased investment in Japan by foreign investors.
Japanese exports are showing signs of recovery, while imports are increasing gradually.
Looking at the seasonally adjusted monthly indicators for export and import volumes (Figure2-36), the volume of exports has remained almost flat as exports to Asia remain strong despite
the impact of SARS, thus canceling out the decrease in exports to the U.S. Exports are likely toresume growth as the U.S. economic recovery
accelerates. Meanwhile, imports are increasing
after staying almost flat until early 2002.
Looking at a breakdown of export volumes
by country (Figure 2-37), increased exports to
Asia have been offsetting the decrease in exports
to the U.S. since January-March 2003.
Figure 2-38 shows the trend of exports foreach type of goods based on the “Analysis of All
Industrial Activities” published by the Ministryof Economy, Trade and Industry. Exports
plunged in January-March 2003, for decreases inboth capital goods (video equipment to the U.S.)
and consumer durables (automobiles to the U.S.).
Total exports recovered, however, in April-June
2003, as exports of capital goods increased
mainly to Asia.

Deflation Continues but Slows(see p. 44 for Figures)

International commodity prices (excluding crudeoil) rose substantially from the second half of2002 in view of the pending war in Iraq (Figure2-40), and remain strong even though this pressure has subsided.
The decline in the corporate goods prices ofdomestic demand goods (weighted average ofdomestic and import prices) has been slowing. In
detail, the prices of raw materials have been rising since October-December 2002 due to higher
crude oil prices. The prices of intermediate goods
have also been recovering, reflecting the rising
prices of materials for iron/steel and chemicals.
Likewise, the decline in consumer prices(excluding fresh food) is also slowing (Figure2-41), largely due to the increase in medical service prices copayment, which was raised from
20% to 30% of total medical cost in fiscal
2003.46 The prices of public services, etc. also
increased in April-June 2003.47 The decline inprices has also slowed for goods, including agricultural, fishery, stock farm and industrial products.
Corporate service prices have been declining about 1% from the previous year, particularly
in leasing/rental and real estate.
Thus, price deflation has been easing recently. The monthly consumer price index (excluding fresh food) for October rose on the previous year for the first time in 66 months sinceApril 1998. Of course, this is related to special
factors including the changes in taxation and social security schemes and the increase in rice46

The rate of copayment remains unchanged for those aged
70 or over (10%) and children under three years old (20%).
47
Other changes in the social security and taxation systems
in fiscal 2003 include tax hikes on low-malt beer (in May)and tobacco (in July). These changes have had relatively
little impact on consumer prices compared with the increasein copayment rate.
Development Bank of Japan Research Report/ No.44

15

prices48 due to the poor harvest following theunusually cool summer. However, the slowdown
in falling prices of electric machinery implies
that prices are bottoming out as a whole.
11.

Effect of Quantitative Easing Policy Yet
to Materialize(see p. 45 for Figures)

In the financial markets, the overnight-unsecured
call rate has remained near 0% since March 2001,
when the Bank of Japan introduced the quantitative monetary easing policy by adopting the current account balance as the direct target of its
financial guidance policy (Figure 2-42). Yields
on three-month CDs (bid), which represent
short-term interest rates, have remained ataround 0.1%.
Meanwhile, yields on 10-year government
bonds, a good indicator of long-term interest
rates, fell throughout 2002, as economic prospects remained uncertain due to slumping shareprices both in Japan and abroad. After reaching a
low of 0.4% in June 2003, however, the yields
recovered quickly and exceeded 1% in July,backed by the rise in domestic share prices sinceApril and easing concerns about worldwide deflation. Currently, yields are around 1 to 1.5%. In
comparison, the movement of contracted interest
rates on new bank loans has been stable, in theupper 1% range.
As regards monetary policy, quantitativeeasing measures are still in place. In 2003, thetarget for the Bank of Japan’s current accountbalance was raised successively in April andMay, and currently stands at ¥27-32 trillion, following a further increase in October. Efforts
have been made by announcing that the government and the central bank will work together tofight deflation. The measure is also designed toprepare for possible disruption in the financial
markets caused by the write-offs of
non-performing loans. As a result, the current
account balance has stayed close to the target set
by the Bank of Japan (Figure 2-43).

48

Since rice is not classified as fresh food, its price affects
the consumer price index excluding fresh food.
16

Development Bank of Japan Research Report/ No. 44

As a means of monetary control, themonthly amount of long-term government bondbuys has stayed near ¥1.2 trillion since the decision to raise the amount in October 2002. In
August 2003, the Bank of Japan started buying
asset-backed securities and commercial paper,with underlying assets including accounts receivable of SMEs and claimable assets arisingfrom loans to SMEs. Furthermore, the durationof the government bond repurchasing operation
was extended from six months to one year.
The monetary base, i.e. the total of the Bankof Japan’s current account balance and cash incirculation, has seen double-digit increases since2001, reflecting the monetary policy mentioned
above. In July-September 2003, it recorded a
substantial increase of over 20% on the previous
year (Figure 2-44). Meanwhile, money stock has
been growing 1-2% on the previous year in termsof M2 + CD since the beginning of 2003. The
money multiplier, i.e. money stock divided by
the monetary base, reached a high of 13 in thefirst half of 1992, but has been falling since dueto the relatively rapid growth of the monetarybase to a record low of under 7 recently. Consequently, the effect of the quantitative easing policy has not materialized, as the growth of themonetary base has been absorbed by the decline
in the credit multiplier. Moreover, the growth ofmoney stock has not led to an increase in nominal GDP. The velocity of money circulation, i.e.
nominal GDP divided by M2 + CD, also continues to decline (Figure 2-45).
In terms of credit, the main reason for theincrease in M2 + CD is the growth of credits to
the government including the buying of government bonds, as lending to the private sector, industrial debentures and stocks continue to decrease (Figure 2-46). This trend implies that thegrowth of money stock is propped up by thecredits extended to the government.

III A Medium-term Scenario for
the Japanese Economy−Focusing
on Money Flow and Finance−
In January 2003, the Japanese government
adopted the “Reform and Perspectives – FY2002
Revision” by a Cabinet Decision. Covering theperiod through FY2010, this chapter presents a
medium-term scenario, which considers possible
changes in financial surplus or deficit in eachsector as well as in the flow of funds as a whole,assuming that the structural reform advances asplanned in the “Reform and Perspectives –FY2002 Revision” (Cabinet Decision of January
24, 2002), effectively setting the Japanese
economy on a stable growth path. It also examines how the investment behavior of financial
institutions will change in response to such an
external environment.
1.

Long-term Trends in Financial Surplus/Deficit and Outstanding Loans(see p. 46 for Figures)

Prior to describing the medium-term scenario,
this section examines long-term trends in financial surplus or deficit in each sector and outstanding private bank loans. National Accounts
and Flow of Funds data used in this section are
based on 68 SNA to identify the long-term trends
since the 1960s. Although they differ from thestatistics based on 93 SNA, which are used laterin this report, in terms of the definitions of sectors and account headings, the trend of financial
surplus or deficit can be readily identified. Financial surplus or deficit defines the savings-investment differential from the movementof financial assets and liabilities. Although thetwo coincide in theory, errors are observed in
actual statistics as estimation methods differ. The
analysis and medium-term scenario presented inthis chapter are based on the financial surplus ordeficit given in the Flow of Funds, published by
the Bank of Japan. It is assumed that no errors
exist between financial surplus or deficit andbalance of saving and investment.
Figure 3-1 shows the long-term trend of fi-

nancial surplus or deficit by sector. Personal49
has constantly maintained a financial surplus
since before fiscal 1970, and were the only sector
with financial surplus until the late 1980s. The
surplus reduced in the 1990s, however, as thesavings ratio fell. Corporate business50 had persistent financial deficits until the mid-1990s.
Since then, however, they have maintained a financial surplus as plant and equipment investment has been confined within cash flow. Reaction to the changing financial environment andgreater focus on profitability underlie this change
in corporate investment behavior. The financial
position of the government sector turned positivein the late 1980s, as tax revenues increased on
the back of the booming economy, only to turnnegative again in fiscal 1992. The financial deficit has been increasing ever since as tax revenues
have fallen due to the downturn in the economy
and tax reductions, as well as to increased
spending to stimulate the economy.
Outstanding private bank loans increased
rapidly as a percentage of GDP in the 1980s.
From fiscal 1980 to fiscal 1990, lending increased to the corporate sector, which was increasingly in need of money due to active investment. Consequently, outstanding privatebank loans rose some 40 points as a percentage
of GDP. Although the amount continued to decline in the 1990s due to reduced lending and thewrite-offs of non-performing loans, it still stays
at a high level from a long-term point of view
(Figure 3-2). A projection presented later in thischapter indicates that outstanding private bankloans as a percentage of GDP will be adjusted
throughout the projection period to the level ofthe early 1980s (about 90% of GDP).

2.

Changing Flow of Funds
in Japan since 1990
(see p. 47 for Figures)

Figure 3-3 identifies the changes in the flow offunds by showing variations in the matching relationships of financial assets and liabilities since
49

Personal includes proprietorships and non-profit organizations as well as households.
50
Corporate business includes moneylenders and somegovernment-affiliated corporations as well as private andpublic non-financial corporations.
Development Bank of Japan Research Report/ No.44

17

fiscal 1990 according to the Flow of Funds(based on 93 SNA) and various financial statements. Specifically, the financial assets held by
each sector are pro-rated to other sectors according to the composition of the corresponding liabilities to clarify the matching relationships offinancial assets and liabilities between sectors.51
Hence, the figures that are not in parentheses ( )are based on assumptions and different from actual figures. Also, it should be noted that thetrend in balance reflects the change in actual
market values (share prices in particular) as wellas the flow of funds.
Figure 3-3 shows changes in the flow offunds since fiscal 1990. In the household sector,
increase in overall financial assets led to thegrowth of deposits and other financial assets held
in private financial institutions, as well as postal
savings and public pensions. In contrast, the flowof household money to non-financial private
corporations through stocks and debentures has
been decreasing, suggesting that investment behavior is becoming more risk-averse. In private
financial institutions, the flow of funds tonon-financial private corporations has been decreasing, particularly through loans, whereas
more money is flowing into the government sector mainly through the buying of government
bonds. Housing loans and outward investment insecurities have also increased.
The flow of funds to the government sector
has also been increasing through postal savings,
postal life insurance and public pensions.
Meanwhile, the flow of funds to government financial institutions increased until the end of
1996, followed by a decline toward the end of
fiscal 2002. This trend indicates a strong demand
for money in the government sector itself.

3.

Background of Medium-term
Scenario(see p. 48 for Figures)

The medium-term scenario in this report presents
possible changes in financial surplus or deficit ineach sector and in the flow of funds as a whole,51
Based on the money flow matrix presented in Tsujimura
and Mizoshita, Shikin Junkan Bunseki: Kiso Giho to Seisaku
Hyoka (Flow of Fund Analysis: Basic Techniques and Policy Assessment), Keio University Press, 2002.

18

Development Bank of Japan Research Report/ No. 44

assuming that the Japanese economy starts togrow as planned in the “Reform and Perspectives– FY2002 Revision.” It also examines how theinvestment behavior of financial institutions willchange under such circumstances. No targets arepresented, however, in the “Reform and Perspectives – FY 2002 Revision” (Cabinet Decision ofJanuary 24, 2002). Therefore, the medium-term
scenario uses the estimates of real/nominal GDP
growth rate,52 rise in the GDP deflator, the balance of saving and investment by sector (i.e. financial surplus or deficit by sector), outstanding
government debts and long-term interest rates,
presented in the “Cabinet Office Background
Paper” assuming a “one-third state contribution
to the basic pension.” The Background Paper
was submitted to the Council of Economic andFiscal Policy on January 20, 2002. The trend of
GDP by demand item and the details of the savings-investment balance in the private sector(private corporations, households, etc.), which
are not explicitly shown in the Background Paper,are estimated by the DBJ in line with the Cabinet
Office estimates (Figure 3-4).
In the “Recent Trends in the Japanese
Economy: A Medium-term Scenario for the
Sustainability of the Japanese Economy,” DBJ
Research Report No. 36 (February 2003), theEconomic & Industrial Research Department
prepared a medium-term scenario to fiscal 2010,
based on the Reform and Perspectives. Although
it differs from the present medium-term scenario
in terms of current growth rate and the timing ofovercoming the deflation, the long-term economic growth rate and the determinants ofgrowth by demand item are similar (Figure 3-5).
In terms of aim, the analyses and projections of
the medium-term scenario last February focusedon the real economy, whereas this report focuseson the flow of funds, looking at a similar movement of the real economy from a financial viewpoint.
According to the Cabinet Office Background Paper, the Japanese economy, following
an intensive adjustment period to fiscal 2004,
will move out of the recession in fiscal 2005 and52

Data for fiscal 2003 are adjusted in accordance with
“Fiscal 2003 Economic Trend Estimates (Cabinet Office
Estimates),” published by the Cabinet Office on September
26, 2003.

achieve growth of 1.9% by fiscal 2010 (Figure3-4). The projection by the DBJ Research Department in the present medium-term scenario
considers consumption as the most importantdemand item in propping up the economic
growth. Nominal long-term interest rates53 will
stay close to the nominal economic growth rate
under appropriate monetary policies and public
debt control policies (Figure 3-6).
4. Medium-term Outlook of Financial

Surplus/Deficit by Sector(see p. 49 for Figures)
Figure 3-7 looks at the trend of GDP by demand
item: the government sector (government consumption + public investment + public inventory
investment), the household sector (private consumption + residential investment) and the private business sector (private non-residential investment + inventory investment). In contrast to
the economic growth led by private demand in
the 1980s, the government’s share in economic
activities increased in the 1990s. However, thefinancial deficit of the general government increased, while private nonfinancial corporations
have built financial surpluses.
Even after fiscal 2003, the private sector
will remain in surplus and the government sector
in deficit. In other words, the deficit of the general government will continue to be financed by
the surplus in the private sector. Although theprivate sector will continue to hold surplus
money, the financial surplus in households will
be reduced, while the corporate sector will
maintain a large financial surplus. On the other
hand, the general government will remain shortof money, although the deficit will be reduced
progressively. It is estimated that Japan as awhole will retain financial surplus, which meansthat the balance of payments will remain positive(Figure 3-8).
The following sections examine the trends
in investment and savings behavior as well as infinancing and repayment for each of the threemajor sectors in the domestic economy: private
non-financial corporations, household and the53

Interest rates are those projected in the Cabinet OfficeBackground Paper.

general government. Analyses and projections
are based primarily on the BOJ’s “Flow ofFunds” (93 SNA).

Private Business Sector to
Maintain Financial Surplus(see p. 50 for Figures)

5.

Financial surplus or deficit in the private business sector largely depends on the relationshipbetween cash flow54 and plant and equipment
investment, which account for most of private
investment.55
Looking first at the trend of private
non-residential
investment,
real
privatenon-residential investment by private corporations56 will continue to rise gradually toward astable GDP growth of 1.9% by fiscal 2010 (Figure 3-9). Throughout the projection period,
however, pressure for adjustment will continue
not only on new investments but also on the existing capital stock to correct the long-termslump in return on capital throughout the 1990s.
This will exert a structural downward pressure
on plant and equipment investment. Meanwhile,
private non-residential investment deflator is expected to rise less rapidly than the GDP deflator.
As a result, the ratio of nominal private
non-residential investment to GDP will remain in
the lower 14% range in fiscal 2010.
Moreover, efforts to improve profitability
will continue to affect labor and other costs aswell as plant and equipment investment. Consequently, the capital share as a percentage of GDP
will rise more than seven points from 25.5% in
fiscal 2001 to over 33%, thus resuming the levelof the early 1990s. Even assuming that part ofthe increase will be offset by the growth of R&D
investment, plant and equipment investment will
stay within cash flow. Thus, private nonfinancial
54
For the purpose of this chapter, cash flow refers to “savings” (including the consumption of fixed capital) in SNA.
55
Other investment components, such as the transfer ofland, used assets and home equities, are excluded from theanalysis.
56
Includes investment by financial/insurance businesses,
proprietorships and non-profit organizations, as well as byprivate non-financial corporations. The following discussion
assumes that the growth rate of plant and equipment investment by private non-financial corporations equals thatof private plant and equipment investment.

Development Bank of Japan Research Report/ No.44

19

corporations as a whole will maintain financial
surpluses (Figure 3-10). If investment remains
below profits, pressure may increase to distributethe profits to shareholders through increased
dividends for example. However, this report assumes no change in the distribution of profits.
The retention of financial surplus will leadeither to an increase in financial assets or to a
reduction in financial liabilities. Given that financial assets will increase slowly under stableeconomic growth, financial liabilities are expected to continue to decrease. In particular,borrowings from private banks will continue todecline 6-7% in terms of the ratio of flow tostock (excluding loan write-offs and other factors). The balance of financing through debentures and commercial papers is expected to stayunchanged from the level of fiscal 2002 (Figure3-11), as the share of financing from the capital
markets through debentures and commercial papers in total external financing will increase relatively, particularly in large-sized businesses. Active financing through this channel will further
reduce borrowings from private banks. Equity
financing is expected to increase each year.
However, this does not mean that equity financing will be stimulated; rather, it is assumed thatthe establishment of new businesses and capitalincrease will continue at the current pace. 57
Trade credit will serve to reduce liabilities after
assets and liabilities are netted out, due to reduction in proprietorships as receivers of trade credit,
as well as asset mobilization factors.
Financing through mobilization of assets
such as trade credit and money deposited (guarantee charges for tenants) has been expanding
rapidly. This type of financing is expected to
grow even further as businesses are forced to
improve asset efficiency (Figure 3-12). The increase in financing through such asset mobilization will increase the pressure to reduce financial
liabilities.

57

Equity financing amounted to some ¥20 trillion in total
from fiscal 1998 to 2002.
20

Development Bank of Japan Research Report/ No. 44

Household Savings Ratio to Decline,
Reducing Share of Cash and Deposits(see p. 51 for Figures)

6.

In the household sector, the relationship between
savings and financial assets is often misunderstood. Although savings in terms of flow issometimes interpreted as a change in financial
assets, SNA (System of National Accounts) defines savings in terms of flow as the difference
between disposable income 58 and final consumption. The savings-investment differential in
SNA, i.e. change in financial assets, representssavings in terms of flow net of real asset transactions including residential investment.59 Hence,savings measured as flow does not coincide withchange in financial assets.
Bearing this in mind, the household savings
ratio based on SNA (Figure 3-13) has been contracting since the 1980s with some annual fluctuations. The trend may be explained by the reduction in provident savings due to the development of social security schemes and the calmingof inflation, as well as by population aging. The
decline in the savings ratio has been particularly
significant in recent years, largely due to the reduction in incomes induced by recession. Some
special factors also came into play. For example,
fixed-amount postal savings accounts opened in
the high interest period of 1990-91 reached maturity dates, leading to massive payments of interest income tax.60 The savings ratio based on
SNA has not been published for fiscal 2002, but
it seems to have continued its substantial decline
as income fell, judging from the financial surplus/deficit in the household sector published in
58

Disposable income + changes in pension reserves inpension funds, to be exact. For convenience purposes,changes in pension reserves in pension funds are included indisposable income.
59
By definition, the following expression holds:
disposable income – final consumption = savings = real
asset transactions + savings-investment differential (change
in financial assets).
60
Although SNA adopts the accrual method in accounting
for transactions, tax payments are recognized on a cash
basis. Therefore, earned interest amounts were distributed toeach period for statistical purposes, whereas the whole interest amounts were actually paid at maturity. Meanwhile,
tax payments were recognized in their entirety at maturity.
Some argue that this technical factor suppressed the savings
ratio in 2000 and 2001.

the Flow of Funds and the condition of residential investment (Figure 3-14).
Looking ahead, the savings ratio will gradually shrink as the population ages. Based on theso-called lifecycle hypothesis, retired people will
spend more than they earn by drawing from savings. Thus, aging suppresses the savings ratio.
Indeed, positive analyses on national savings
ratios have reported that the savings ratio has astable negative correlation with aging.61 In Japan,
the share of population aged 65 and over is estimated to rise from 17.4% in 2000 to 22.5% in2010 (estimate by the National Institute of Population and Social Security Research, January2002), which largely explains the decline of thehousehold savings ratio. Elsewhere, the numberof proprietorships will continue to decline, leading to a decrease in mixed income, which is included in disposable income. This will also exert
downward pressure on the savings ratio.62
Real private residential investment, which
has been slumping due to the difficult income
and employment conditions (see Chapter II), is
expected to increase gradually (Figure 3-14).
Consumer sentiment toward purchasing housing
will start to recover, backed by improvements inincome and employment conditions in the years
ahead. Although residential investment perhousehold will stay almost flat, the number ofhouseholds will continue to increase, even after
the total population starts to contract after peaking in 2006 (estimate of the National Institute ofPopulation and Social Security Research, October 2003).
The downtrend in the savings ratio and thegradual increase in residential investment, which
represent typical real asset transactions, will leadto a mild increase in financial assets in the years
ahead (Figure 3-15). Since the Flow of Funds
evaluates stocks and securities at market values,
however, the balance of financial assets will be
substantially affected by the fluctuation of thoseasset prices. In the 12-year period from fiscal
1991 to 2003, the value of assets fell ¥106 tril61

See Cabinet Office, “Annual Report on Economy and
Finance FY2002” Section 3-2, and Callen, T., and C. Thimann (1997), “Empirical Determinants of Household Saving: Evidence from OECD Countries,” IMF Working Paper
WP/97/181.
62
According to 93 SNA, the household sector includes
proprietorships, or unincorporated business entities.

lion due to the fluctuation of asset prices (mainly
the decline in share prices). The decrement isequivalent to 7.7% of the balance of financial
assets at the end of fiscal 2002 (¥1,369 trillion).
Thus, the value of financial assets will largely
depend on market prices. The present scenario
assumes that share prices will rise with the economic recovery. In light of the expected change
in asset prices, the balance of financial assets in
the household sector will amount to some ¥1,600
trillion as at the end of fiscal 2010. Even in thiscase, however, average annual growth of financial assets will be only 1.9%, which is lower than
the average annual growth in the 1990s (3.6%),
when asset values shrank as share prices fell.
Finally, the composition of household financial assets is shown in Figure 3-16. The shareof cash and demand deposits has been risingsince the second half of the 1990s, for they wereconsidered highly liquid and stable assets against
the backdrop of a series of financial crises andthe slumping economy. Looking ahead, however,as the financial turmoil ends and interest rates
recover (Figure 3-6) the opportunity cost ofholding less profitable financial assets will rise.
Therefore, the amount of cash and demand deposits – the so-called “deposits at home” − will
decrease.
Meanwhile, the share of stocks and securities has declined as share prices fell throughout
the 1990s and money shifted to cash and demand
deposits. As a result, the share of stocks and securities in total assets had declined by almost
one-third by the end of fiscal 2002 from fiscal
1990, the tail end of the bubble economy. Looking ahead, the share of stocks and securities is
expected to increase63 due to recovery in shareprices and interest rates; reductions in theamount of stock investment units; and a series of
securities market reforms to encourage the participation of individuals, such as eliminating thesecurities exchange tax. In Japan, risk-free assets
whose principal and interest are guaranteed, suchas deposits, occupy a large proportion of household financial assets rather than risky assets including stocks (see international comparison in(Appendix 2)).64 Recently, however, the volume
63

The increase includes the impact of changing asset prices,such as the rise in share prices.
64
It has also been argued that no substantial difference inDevelopment Bank of Japan Research Report/ No.44

21

of stock trading by individuals has been rising
rapidly as stock trading on the Internet has
spread.65 Thus, more individuals are likely toparticipate in the stock market in the years ahead.
Nonetheless, the increase in the share ofstocks and securities will be slow. Even in fiscal
1988 during the bubble when the share of stocks
was largest, it was only just under 12% (based on
68 SNA).66 This is because households shifted
their money not only to stocks but also to fixedhigh interest-bearing products such as securities
and large-sum time deposits as rising shareprices were followed by rising interest rates.
Since the present scenario predicts that the economic recovery will be accompanied by a rise ininterest rates, time deposits are expected tomaintain a certain share in household financial
assets. Hence, the share of stocks will not growso strongly.
7.

Primary Balance to Improve
despite Further Increase in
Government Debts(see p. 52 for Figures)

Section II-8 above confirmed that government
finances have deteriorated since the mid-1990s
despite cutbacks on public investment. Also inthe projection period, public investment willcontinue to decrease while social security costs
including healthcare will rise, exerting pressure
on government finances throughout the period(Figure 3-17).
According to the Cabinet Office Background Paper, the primary balance deficit as apercentage of nominal GDP will improve from
5.4% in fiscal 2003 to 1.3% in fiscal 2010. Thus,
the balance will not turn positive in the projection period. Likewise, the financial deficit of thethe composition of household assets exists between Japanand the U.S., if real assets, such as land and housing, areincluded in the analysis as risky assets. See Economic Planning Agency, “Annual Report on Japanese Economy,
FY1999,” for example.
65
The volume of stock trading by individuals has risen
rapidly so far in fiscal 2003. In the first section of the Tokyo
Stock Exchange, the volume of stock trading by individuals
in the first half of fiscal 2003 increased 130% on the previous year (Tokyo Stock Exchange, “Investment Trends by
Investor Category”).
66
At the end of fiscal 1988, the Nikkei average share pricewas ¥32,839, the highest year-end value.
22

Development Bank of Japan Research Report/ No. 44

government sector will diminish (Figure 3-18).
The difference between the primary balance andthe financial deficit represents interest payments
and the financial surplus or deficit of social security funds. 67 Consequently, outstanding public
debts (= straight central government bonds + local government bonds + borrowings in special
account for tax allocations) will continue to increase, from ¥637 trillion at the end of fiscal
2003 to ¥856 trillion at the end of fiscal 2010
(Figure 3-19).
Private financial institutions have primarily
absorbed government bonds as an alternative
investment to loans and as risk-free assets 68(Figure 3-20). The holding of government bonds
by financial institutions will necessarily continue
to grow, subject to appropriate public debt management and financial policies to avoid any rapid
rise in market interest rates through the maintenance of stable government credit. The share of
the Bank of Japan in government bond holding
has exceeded 10%, mainly through purchases oflong-term government bonds. The increase in theshare of postal savings includes the shift ofmoney deposited with the ex-Trust Fund Bureau
to fiscal loan bonds.
8.

Current and Future Behavior ofPrivate Financial Institutions(see p. 53 for Figures)

Based on the projection of financing and repayments in the three sectors examined above, thissection projects changes in the fund management
behavior of private financial institutions.69 Future financial assets of private financial institutions are estimated, mainly using the growth rateof liabilities in the three sectors examined above.
Looking at actual figures regarding the investment of financial institutions, credited loans
decreased throughout the 1990s mainly due tofalling demand for funds in the corporate sector
67
In Figure 3-18, social securities are not included in the
primary balance but are included in the financial deficit or
surplus.
68
Zero risk weighting for the purpose of BIS regulations.
69
For the purpose of this section, private financial institutions refer to the total of domestic banks, Japanese branchesof foreign banks, financial institutions for agriculture, forestry and fisheries, and those for SMEs, or “Banks, etc.” inthe Flow of Funds.

and write-offs induced by the economic slump.
Since the second half of the 1990s, financial institutions have diversified their portfolios by expanding investments in government bonds, derivatives and foreign securities.
Looking at the composition of loans, whose
importance as a whole has been declining, corporate70 loans have been shrinking while individual loans are increasing, led by housing loans.
Lending to the public sector is also increasing,but its share in the total is still small.
Looking ahead, corporate credits includingloans will continue to decrease due to reduced
flows, although write-offs will come to a halt. In
contrast, credits to the fund-starved public sector(including the purchase of government bonds) willcontinue to increase, as well as individual loans
including housing loans and consumer credits(Figures 3-21 and 3-22). The value of stockhold-ing is expected to change little, as the rise inshare prices will be offset by the matching disposal of shares to unravel cross shareholdings.
As outstanding loans decrease, private financial institutions are changing their profit
structures to avoid relying too heavily on the increasing volume of outstanding loans. Means ofsuch structural reform include the diversificationof portfolios as well as regaining the profit margin, which has been shrinking due to financial
liberalization measures introduced in the 1990s(Figure 2-23), while focusing on services thatwill bring stable commission incomes, such as
the organization of project finance and syndicated loans, and commitment lines (Figure 3-24).
New business models are also being developed,
including the establishment of a new type ofbank specialized in settlement operations.

70

Includes proprietorships. Public corporations are included in the public sector.
Development Bank of Japan Research Report/ No.44

23

(Appendix 1)
Trends in Public Finance(see p. 54 for Figures)
The outstanding loans of government financial
institutions (two banks and six financial corporations, including the international finance accountonly as regards the Japan Bank for International
Cooperation) have been declining since the peakat the end of fiscal 2000 (Figure 3-25). The decline is particularly sharp for the Housing Loan
Corporation, which accounts for 50% of outstanding loans.
Looking at public finance in a broad sense,71
including loans provided by postal savings,
postal life insurance and fiscal loan program
funds, as well as government financial institutions, the amount of outstanding loans is about
2.5 times as large as the outstanding loans ofgovernment financial institutions as at the end of
fiscal 2002. The government is the largest borrower with 40% of the total, followed by households (housing loans). Loans to the government
have been increasing steadily, while lending tohouseholds (housing loans) and private firms has
been declining recently (Figure 3-26). Figure 3-3
shows that the expansion of public sector financing through government financial institutions has been limited in scope as compared withfinancing through government bond issues.
The share of loans provided by publicfinance in financial liabilities (excluding sharesand other equities) has declined in the public
sector due to increased financing through government bond issues, as well as in households
due to reduced housing loans. The share of public financial institution loans in the liabilities ofprivate non-financial corporations is relatively
small, and has leveled off in recent years (Figure3-27).
(Appendix 2)International Comparison
This section presents a comparison among Japan,
the U.S., Germany and the U.K. on (1) financial
surplus or deficit in each sector, (2) nonfinancial
business financing and (3) household money

71“Lending by public loans” in the Flow of Funds minus
loans for postal savings and loans by government financial
institutions.
24

Development Bank of Japan Research Report/ No. 44

management.72
International Comparison 1:
Financial Surplus/Deficit by Sector(see p. 55 for Figures)
In Japan, as mentioned in Sections 2 and 4 above,
the household sector consistently has a financial
surplus, but its amount shrank throughout the
1990s as the savings ratio fell (Figure 3-28). In
contrast, the nonfinancial business sector posted
a positive financial balance in fiscal 1998 and thesurplus has continued to grow. Japan is the only
country among the four, whose nonfinancial
business sector recorded a financial surplus in
two or more of the recent several years. The
government sector has had a consistent financial
deficit, which has been financed by the nonfinancial business and household sectors. Japan
continues to enjoy a financial surplus as a whole.
In the U.S., the household sector has tended
to record financial deficits since 1999. The government had a financial surplus from 1998 to2000, as the booming economy in the second
half of the 1990s boosted tax revenues. However,
the government sector has been in financial deficit since 2001 as tax revenues declined due to theeconomic slowdown and tax reduction measures.
Including the nonfinancial business sector, theU.S. as a whole remains in deficit and so thecountry is increasingly dependent on money
flows from overseas.
In Germany, the household sector continued
to enjoy an increasing financial surplus throughout the 1990s. The financial balance of the nonfinancial business sector turned positive in 2002.
The government sector tends to maintain a financial deficit although it enjoyed a temporary
surplus. The inflow of money from overseas
throughout the 1990s, mainly through the purchase of government bonds by non-residents,
was reversed in 2001. Movements in the government and nonfinancial business sectors in1995 are due to an extraordinary factor resulting
from the integration into the government’s general accounts of the debts of the Treuhandanstalt.
Movements in the corporate, government andoverseas sector in 2000 were partly due to the72

The definition of each sector and financial transaction
item is based on Bank of Japan (2000) “Statistics of International Comparison Centered on the Japanese Economy.”sales of licenses for the domestic mobile phonebusiness to German and foreign corporategroups.
In the U.K., the financial surplus traditionally maintained by the household sector has been
reversed since 2001. The financial deficit in thegovernment sector started to shrink in 1995 andfinally reversed in 1999 as tax revenues increased thanks to the strong economic performance and the tax reforms implemented in 1994
and 1995. The financial deficit in the nonfinancial business sector increased in the late 1990s
but has stayed almost flat since then.
International Comparison 2:
Nonfinancial Business Financing(see p. 56 for Figures)
The large share of borrowings characterizes nonfinancial business financing in Japan. In fiscal
2002, stocks and investments accounted foraround 30% of total nonfinancial business financing, while borrowings were 40% (Figure3-29). Japanese firms have been reducing liabilities, particularly borrowings. Thus, Japan is the
only country among the four to have experienced
a decline in the total of liabilities and capitalfrom fiscal 1998 to 2002 (Figure 3-30).
In the U.S., the share of stocks and investments fell in 2002 after exceeding 60% in 1997.
Nonfinancial business financing in the U.S. ischaracterized by emphasis on stocks and investments and rather than borrowings, in stark contrast to Japan. The fluctuation in the compositionof nonfinancial business financing is largely explained by changing share prices rather than by ashift in the means of financing.
In Germany, the share of stocks and investments surpassed that of borrowings in 1997, but
the movement was reversed in 2002. As in thecase of Japan, borrowings account for a large
share – over 40% – in total nonfinancial businessfinancing. The reduction in the share of stocks
and investments in 2002 from 1997 is partly explained by the change in the variance of estimating stocks resulting from the fluctuation of shareprices. In fact, the flow of stocks actually increased from 1998 to 2002.
As in the U.S., U.K. firms depend mainly on
direct financing through stocks, investments andother securities. The share of non-stock securities,

including commercial paper and industrial debentures, had increased to about 10% by 2002.
International Comparison 3:
Household Money Management(see p. 57 for Figures)
As of fiscal 2002, cash and deposits dwarf stocks
and investments among the assets of Japanesehouseholds. Thus, household money management in Japan is characterized by a high proportion of risk-free assets as compared with theother three countries (Figure 3-31). Trends in thecomposition of household assets indicate that theshare of cash and deposits is increasing, reflecting an even stronger preference for risk-free assets following the financial crisis in the 1990s
induced by the failures of banks and securities
firms (Figure 3-32).
In contrast, U.S households typically preferrisky assets. Indeed, cash and deposits represented only about 10% of total U.S. household
assets as of 2002, while non-stock securities,
stocks and investments combined accounted forover 50%. The change in the share of stocks andinvestments is mainly caused by the variance of
estimating stocks resulting from the fluctuationof share prices. In terms of flow, the amount ofhousehold investment in stocks declined in both
1993-97 and 1998-2002.
As in Japan, cash and deposits have traditionally dominated the assets of German households, but the share has been decreasing in recent
years. Meanwhile, the share of insurance andannuity reserves had increased to around 30% by
2002. Also, the share of investment trusts, included in non-stock securities, reached almost
10% in 2002. Efforts to promote the securities
markets by the German government have fueledhousehold money management through investment trusts.
Household money management in the U.K.
is characterized by a large share of insurance andannuity reserves as compared with the otherthree countries. The Tory government led by
Margaret Thatcher started to reduce public pension benefits to encourage people to buy funded
private pension plans. Since then, the role ofpublic pensions has declined, stimulating asset
management through private pension plans.

Development Bank of Japan Research Report/ No.44

25

(Appendix 3)
Views on Medium-term Prospects for theJapanese Financial System(see pp. 58-59 for Figures)
Different views have been expressed on the future direction of the Japanese financial system,
and may be classified into two categories:
I. Arguments for transition to a market-oriented
financial system through the “Japan’s financial
Big Bang.”
II. Arguments that leave some room for the traditional role of banks in light of the unique financial structure in Japan, while recognizing thata market-oriented financial system will become
increasingly important.
Various factors will facilitate the transition of
the Japanese financial system to a market-oriented one. According to Baba and Hisada(2001), 73 those factors include changes in thefinancial environment such as (1) innovations in
information technology,74 (2) globalization, (3)financial deregulation and (4) changing demandof businesses and households for financial services. This section describes these two types ofview in recent years concerning the future of theJapanese financial system.
I. Arguments stressing transition to a market-oriented financial system(1) Hoshi and Kashyap (1999)75
The progressive liberalization of the Japanesefinancial system has reduced the dependence oflarge businesses on banks for financing. However, deposits still remain the most popular fundmanagement method for Japanese households.
73“Japan's Financial System: Its Perspective and the
Authorities' Roles in Redesigning and Administering the
System,” IMES Discussion Paper No. 2002-E-1.
74
Innovation in information technology (1) allows the development of new financial instruments such as MBS(mortgage-backed securities) and ABS (asset-backed securities), (2) expands e-commerce and improves the efficiencyof market transactions and (3) enables the use of new lending techniques such as credit scoring, which quantifies corporate creditworthiness based on financial statements tomake judgments (see Institute for Monetary and Economic
Studies, Bank of Japan (2001) for details). Some U.S. firms,
such as Dun & Bradstreet, provide corporate information
including indicators that quantify corporate risks using statistical techniques.
75“The Japanese Banking Crisis: Where Did it Come Fromand How Will it End?”, NBER Macroeconomics Annual.
26

Development Bank of Japan Research Report/ No. 44

Full liberalization of the Japanese financial sector will promote the development of the capital
markets, leading to a transition to a U.S.-stylesavings and financing structure. Hence, thedominance of the banking sector will be undermined. The transition to the U.S.-style structure
will result in a 30-50% reduction in bank loans.
The process will be completed in 10 years depending on (1) the review of corporate liabilities,(2) the diversification of portfolio management
for households and (3) progress in restructuringof the banking sector.
II. Arguments valuing the traditional role ofbanks despite the increased importance of amarket-oriented financial system(1) Roundtable Committee on the Vision of theJapanese Financial System and Future Policies(2002)76
The Japanese financial system needs to betransformed into a “financial system in which
both industrial financing and market financing
are utilized with the market function set as itscore.”In the new system, intermediaries are expected to assume the following roles:(i) In wholesale (large and medium-sized businesses), as investment banks that respond to thedemand of individual companies using sophisticated financial techniques.
(ii) In retail (SMEs and individuals), reviewing
a huge number of financing applications at low
cost using the scoring system, while maintaining
traditional lending activities through individual
reviews.
Businesses are expected to become less dependent on external financing and limit theirplant and equipment investment within internal
reserves.
Individuals may participate in portfolio
management involving the selection of financial
institutions, large sums of money movement andsearch for higher returns, if financial services arediversified and their financial knowledge improves.77
76“The Vision for the Future of the Financial System andPolicy – Foundation for Japan with prosperity and diversity.”
77
Allen and Santomero (1997) note that with the development of various financial instruments due to innovations in(2) Allen and Gale (2000)78
A shift toward market-oriented financial systems is underway, such as the formation of aEuropean single market with the launch of the
EU and the financial Big Bang in Japan. A
trade-off exists between a market-oriented system and a banking-oriented system, and no single
conclusion can be drawn as to which system ispreferable.

information technology, households and businesses have to
pay a higher cost to understand financial products (participation cost). See Federal Reserve Bulletin (July 2003) forthe efforts of the U.S. Federal Reserve System (FRS) to
improve the financial knowledge of households.
78“Comparing Financial Systems,” MIT Press.

(3) Ishida and Mio (2000)79
In recent years, attention has focused on
non-traditional means of settlement including
EDI settlements between businesses ande-money. However, such new methods have inherent problems, i.e. the asymmetric information
for EDI settlements and security issues fore-money. Therefore, banks will continue to playa prominent role as providers of the most important means of settlement, namely deposit currency.

79“Vision of the Japanese Banking Sector in the Future –An Examination of its Macroeconomic Size Approachedfrom Demand for Deposit Currency,” Monetary and Economic Studies, Vol. 19, No. 2, Institute for Monetary andEconomic Studies, Bank of Japan.
Development Bank of Japan Research Report/ No.44

27

I. World Economy Picking Up, Led by U.S. and Asia
U.S. (1): Personal Consumption Boosted by Tax Reduction,
Plant and Equipment Investment Recovering
Figure 1-1. Trends in Real GDP(annualized change on previous year, %)12

Personal consumption
Change in inventories
Government consumption
GDP growth rate (annualized change on previous year)

8

Residential investment
Net exports
Non residential investment

4
0
-4
-8
97

98

99

00

01

02

Source : U.S. Department of Commerce, “National Income and Product Account.”

03(CY quarterly basis)

Figure 1-2. Personal Consumption Trends(1985=100)
160(annualized change on previous year, %)
14

140

10

120

6

100

2

80
60

-2

40

-6

Consumption propensity factor

Disposable income factor

Personal consumption (annualized change on previous year)

Consumer confidence index (right scale)

20

-10

0
97

98

99

00

01

02

03
(CY quarterly basis)

Sources : U.S. Department of Commerce, “Personal Income and Outlays;” The Conference Board data.

Figure 1-3. Trends in Real Plant and Equipment Investment and Corporate Profits
6(annualized change on previous year, %)(annualized change on previous year, %)

4

25
15

Corporate profits (right scale)

2

5

0
-5

-2

IT-related (hardware)
Buildings
Overall plant and equipment investment-4

IT related (software)
Others

-15

-6

-25
97

98

99

00

Note :

01

Corporate profits, with inventry valuation and capital consumption adjustments,
represent nominal seasonally adjusted annualized change from the previous quarter.
Source : U.S. Department of Commerce, “National Income and Product Account.”− 29 −

02

03(CY quarterly basis)

U.S. (2): Production Showing Signs of Improvement,
Delayed Recovery in Employment
Figure 1-4. Industrial Production Growth(seasonally adjusted)
(%)

6

(%)
Manufacturing capacity utilization (right scale)Composite index
Consumer goods
Equipment

4

Figure 1-5. Quarterly Changes in Number of
Employees and Unemployment Rate
100
95

2

90

0

85

-2

80

-4

75

-6

70
97

98

99

00

01

02

8

Government
Mining/construction
Services, etc.
Manufacturing

100

7

50

6

0

5

-50

Changes in thenumber of
employees

Unemployment rate (right scale)

-100
97

03/7 1003(%)(seasonally adjusted, 10,000 persons)

150

98

99

00

01

(CY quarterly basis) (monthly basis)

02

03

4
3

03/7 10(CY quarterly basis) (monthly basis)

Source : FRB, “Industrial Production and Capacity Utilization.”

Note :The number of employees represents monthly average forthe non-agricultural sector.
Source : U.S. Department of Labor, “Employment Situation.”

Figure 1-6. U.S. Trade Balance (by trading partner)
0($ billion)

-100
-200
-300
-400

Japan

China

Others

-500
85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

(CY)

Notes :

1. Trade balance covers goods only.
2. January-May total for 2003.
Source : U.S. Census Bureau, “Foreign Trade Statistics.”

Figure 1-7. Stock Market Indexes
12000
11000

($)
Dow Jones Industrial

Figure 1-8. Long- and Short-term Interest Rates(points)
6000

7

5000

6

10000

4000

9000

3000

8000

2000

7000

Nasdaq Composite Index (right scale)

6000
1/01 5/01 9/01 1/02 5/02 9/02 1/03 5/03 9/03

03 /1-5(%)

10-yeargovernment bonds

5
4
3
2

1000

1

0

0
1/01 5/01

Sources : Dow Jones, National Association of Securities Dealers and
DRI database.

−30 −FF target rate

9/01 1/02 5/02 9/02 1/03 5/03

Sources : FRB data; Wall Street Journal.

9/03

Economies of Major European Countries (Germany, France, U.K.): Looking for Recovery

Figure 1-9. Real GDP of Major European Countries(annualized change from previous quarter by component)(%)(1995 as base year)(1) Germany

10
5

0.9

0
-5

▲1.0
▲0.7

-10
97

98

(%)

10

99

00

01

02

03
(1995 as base year)(2) France

5

0.2
1.5

0
▲1.4

-5
97

98

(%)

99

00

01

02

03
(2000 as base year)(3) U.K.

10

0.7

5

2.4
2.4

0
-5
(CY quarterly basis)-10

Private consumption
Exports

Government consumption
Imports (reverse sign)

Inventories
GDP

Fixed capital formation

Sources : Statistisches Budesamt (StBA), Direction Générale de l’Institut National de la Statistique et des Etudes Economiques (INSEE) andU.K. Central Statistical Office data.

Figure 1-11. Trend of Unemployment Rate
Figure 1-10. Industrial Production Index in Major
European Countries(annualized change from previous quarter)
(%)

3
2

(%)

12
10
8
6
4
99

1

00

01

Germany0-1France03(monthly basis)
U.K.

Figure 1-12. Financial Policy

Germany
France
U.K.

-2

02

(change on previous year, %)
8

-3
96

97

98

99

00

01

02

6

03

(CY quarterly basis)
1. Based on seasonally adjusted values.
2. Based on the ILO standard values for international comparisonsof unemployment.
Sources : StBA, INSEE, U.K. Central Statistical Office, Eurostat andEuropean Central Bank data.

Notes :

− 31 −

42(monthly basis)

0
99

00

01

ECB intervention rate

02

03

Bank of England interest rate

Economies of Major Asian Countries (Korea, Taiwan, Singapore): From Slowdown to Upturn

Figure 1-13. Real GDP Growth Rate

20

Korea

(%)

Taiwan

(%)

15

20

Singapore

(%)

15

15

1.7

10
10

10

4.2

5

5

1.9

5

0
0

-5

0

-10

-5

-5

-15
(CY quarterly basis)

-10
99

00

01

02

(CY quarterly basis)

-10
99

03

00

Fixed capital formation
Net exports
GDP

(%)

(CY quarterly basis)

-20
01

02

03

99

Private consumption
Errors01

02

03

Government consumption
Change in inventories

1.9

Figure 1-14. Manufacturing
Sector Production Index

00

Figure 1-15. Price Inflation
(%)
8

40

Korea

Korea
TaiwanSingapore30
20

Taiwan6Singapore
4

10
0

2

-10
0
-20
(CY quarterly basis)

-30
99

00

01

02

(CY quarterly basis)

-2

03

99

Note :
Growth rates represent year-on-year.
Sources : National statistics

−32 −

00

01

02

03

China: Resuming Rapid Growth with Limited Impact of SARS

Figure 1-17. Composition of Investment
Completed

Figure 1-16. Real GDP Growth(trillion yuan)

(%)
12
10
8
6
4
2
0
-2
-4

50

9.1

40

3

30
2
20
1

10
0

0
00

01

Ⅰ
02

02

Ⅱ

Fixed capital formation

Ⅲ

Ⅳ

Ⅰ
03

Ⅱ

00

Ⅲ

Private consumption

Government consumption

Change in inventories

Net exports

Growth rate

01

(%)

4
3
2
1
0
1 3
02
Amount5

7

9 11 1 3
03

Ⅰ
02

Ⅱ

Ⅲ

Ⅳ

Ⅰ
03

Ⅱ

Innovation

Real estate development

Other investment

Growth of capital construction (right scale)

Growth of innovation (right scale)Ⅲ

Growth of real estate development (right scale)(trillion yuan)

00 02

02

Capital construction

Figure 1-18. Retail Sales of Consumer Goods
5

(%)

4

5

7

Figure 1-19. Exports and Imports(100 million dollars）

15 320280
12 240
200
9 160
120
6
80
40
3
0
0
-40

9

00 02

1 3
02

5

(%)

7

Trade balance

Change on previous year (right scale)

9 11 1 3
03

5

7

9

Export growth (right scale)

Import growth (right scale)Figure. 1-21. Price Indexes

Figure 1-20. Financial Indicators
25

(%)

8

(%)

6
20

4
2

15

0
-2

10

-4
5

-6
00 02

1 3
02

5

7

9 11 1 3
03

5

7

9

00 02

1 3
02

5

M2 growth rate

Raw Materials price index

Growth rate of outstanding loans by all financial institutions

Real estate sales price index

Notes :

7

9 11 1 3
03

5

7

Consumer price index

1. The growth rate represents change on the previous year.
2. Real estate sales price index in Figure 1-21 represents quarterly data.
Sources : IMF, “International Financial Statistics”, China Statistical Yearbook, China Monthly Economic Indicators and People’s
Bank of China data.

− 33 −

70
60
50
40
30
20
10
0
-10
-20

9

II. Japanese Economy: From Standstill to Slight Recovery
Sustainability of Domestic and Overseas “Digital Boom” Holds the Key to Further Recovery
Figure 2-1. Trends in Real GDP (annualized rate of change
from the previous quarter by component, seasonally adjusted)
(%)
16

2/91

10/93

14

5/97

1/99

10/00

1/02

Quarter-on-quarter change in GDP

12Government consumption
Privateconsumption

10
8
6

Exports

4
Plant and equipment
investment
Public investment20-2Imports(reverse sign)-4
Inventory
investment

-6
-8
-10
-12
-14
Housing investment

-16
-18
90

91

92

93

94

95

96

97

98

99

00

01

02

03

(CY quarterly basis)

Figure 2-2. Macroscopic Change in Output and Prices(horizontal axis: real GDP (¥trillion),vertical axis: GDP deflator)
P: price level

AD:
総需要aggregate
ADdemand

P
物
価
水
準

Q4/93
Q2/97

AD

Decline in demand

Rise in GDP deflator

100

需
要
減
少

99
P0

98

Q1/99

Q1/91

97

①
③

Q4/00

Y0

Q1/02

95

Y
YFF’ʼ
YFF
Y
実質GDP
Y
Y: real GDP

Q1/90

93
92
91

Q3/03

90
440

②

供
給
増
加

持続的な物価下落＝デフレ
Sustained decline in price level = deflation

96

94

ASʼ
AS’

Increase in supply

102
101

AS:
総供給
aggregateAS
supplyConcept

460

480

500

520

540

Real GDP growth

560

4
2
0
-2
-4
-6
-8

(%)

Figure 2-3. Year-on-Year Change in Deflator
by Demand Item

▲1.6
▲2.7

GDP deflator
Private consumption deflator
Plant and equipment investment deflator
90

91

92

93

94

95

96

97

98

99

▲7.2
00

01

02

03

(CY quarterly basis)

Notes :

1. 1995 as base year.
2. Contribution to annualized GDP growth in Figure 2-1 is prorated to each item based on its share in contribution before annualization. Government
consumption includes the contribution of public inventories.
3. Real GDP and GDP deflator in Figure 2-2 are seasonally adjusted. (The seasonally adjusted values of the deflator are calculated back from the seasonallyadjusted series of nominal and real GDP.)
Source : Cabinet Office, “National Accounts.”−34 −Production Recovering after Temporary Standstill

Figure 2-4. Trends in Production Indicators (seasonally adjusted)115

10/ 93

2/91

1/99

5/97

10/00

1/02

110
105
100
95
90
85
Industrial production index(2000=100, weight: 22.4%)

Tertiary industry activity index(1995=100, weight: 59.5%)80Construction activity index(1995=100, weight: 8.1%)

75
70
90

91

92

93

94

95

96

97

98

99

00

01

02

03

(CY quarterly basis)
Notes :

Source :1. Weights represent shares in all-industry activity index (GDP from the supply side) and add up to 100 in sum with the agriculture,
forestry and fishery production index (weight: 1.8%) and public service activity index (8.2%).
2 The industrial production figures for October-December 2003 represent the average of estimates for October and November based on
the Survey of Manufacturing Production Forecast.
Ministry of Economy, Trade and Industry.

Figure 2-5. Inventory Cycle (total of mining andmanufacturing sector)
Change in shipments on
previous year (%)

10-12/00
10-12/02

1-3/034-6/975

Sep

7-9/02

4-6/03
7-9/03JulAug0
4-6/02

1-3/01

Unintended
accumulation

Recovery
Adjustment

4-6/01-10

Change in inventories on previous year (%)

7-9/01

1-3/02
10-12/01-15-15

45-degree

Buildup

1-3/99

-5

-10

-5

0

5

10

Change in inventories on previous year (%)
Note :The heavy line stretching from Apr.-Jun. 2003 represents monthly
development from July through September.
Source : Ministry of Economy, Trade and Industry, “Industrial Index.”

Change in shipments on previous year (%)

Change in shipments on previous year (%)

10

Concept(Reference) Inventory cycle from Q4/93 (trough)through Q2/97 (peak)

10
Q2/97

5

0
Q3/95〜Q2/96

生産財の在庫循

Q4/93

-5
-10

-5

0

5

10

Change in inventories on previous year (%)− 35 −

Harsh Employment Situation, but Improving
Figure 2-6. Trends in Ratio of Job Offers to
Applicants and Unemployment Rate
0.8

(%)

(times)Figure 2-7. Unemployment Rateby Age Group
(%)
6.0

15-24

10
0.7

5.0

0.6

4.0

0.5

3.0

25-34
8

Ratio of job offers to applicants

0.4

Unemployment rate (right scale)

55-64
6

35-44

4

45-54

2.0

0.3

652

(CY quarterly basis)
1.0

97

98

99

00

01

02

(CY quarterly basis)030Note :
Seasonally adjusted.
Sources : Ministry of Public Management, Home Affairs, Posts andTelecommunications, “Labour Force Survey;” Ministry of Health,Labour and Welfare, “Statistics on Placement Activities.”

97

98

Note :
Source :

99

00

01

02

03

Seasonally adjusted.
Ministry of Public Management, Home Affairs, Posts andTelecommunications, “Labour Force Survey.”

Figure 2-8. Trend of Year-on-Year Change in Number of Workers and Employees by Component(1) By industry (new industrial classification)
100(2) By status(10,000 persons)(10,000 persons)

110

50

60

0

10

-50

-40

-100

-90
(CY quarterly basis)-150(CY quarterly basis)
-140

99

00

01

02

Construction
Wholesale and retail trade
Services
Total

03

97

Manufacturing
Transport
Others

00

01

02

03

Employees (temporary and daily)

Total number of workers

Figure 2-9. Overtime Hours(seasonally adjusted)(10,000 persons)(index, 2000=100)110

500 employees or over
30-499 employees
1-29 employees
Total

50

99

Employees (regular)(3) By size of corporation (excluding agriculture,
forestry, fisheries and government)
100

98

Self-employed and family workers

All industries

105

Manufacturing

100
95

0

90
-50

85
(CY quarterly basis)(CY quarterly basis)

-100
97

98

99

00

01

80
02

03

97

Note :

Industries are classified according to the new industrial classification(revised in March 2002). The Figure covers the period since 1999,
as data based on the new nomenclature are only available for 1998
and onward.
Source : Ministry of Public Management, Home Affairs, Posts andTelecommunications, “Labour Force Survey.”

−36 −

98

99

00

01

02

03

Source : Ministry of Health, Labour and Welfare, “Monthly Labour
Survey.”Wages Bottoming Out
Figure 2-10. Year-on-Year Change in Wages andSalaries per Person
4(%)

Figure 2-11. Spring Wage Increases and Change
in Bonuses on Previous Year(%)
4

Bonus and special earnings
Overtime pay
Regular wages and salaries
Total wages and salaries

3
2

2.90

3

2.66
2.21

2.06

2.01

2

1.66

1.63

1
0

1

-1
-2

0

-3

-1

-4

Summer bonus
Year-end bonus
Spring wage increases

-5

-2

-6
97

-3

Notes :

97

98

99

00

01

02

03

Note : Business establishments with five or more employees.
Source : Ministry of Health, Labour and Welfare, “Monthly Labour
Force Survey.”(¥trillion)

(%)

4

330
320

2

00

01

02

03

Figure 2-13. Real Consumption(year-on-year change by component)

Figure 2-12. Consumption on GDP Basis
6

99

1.

Summer bonus and year-end bonus include wages and salaries paid assuch in June-August and November-January respectively in businessestablishments with five or more employees.
2. Spring wage increases cover listed companies with trade unions
employing 1,000 or more workers and capitalized at ¥2 billion orover.
Sources : Ministry of Health, Labour and Welfare, “Monthly Labour Statistics” and“Spring Wage Increase Requests and Settlement Conditions for Major
Private Corporations.”(CY quarterly basis)

-4

98

(FY)

4

(%)

2

310
0

0
300

-2

-2
290
-4

-4
280

-6
-8

Real private final consumption expenditure
Change on previous year

270
260

-10
97

98

99

00

01

02

Consumption propensity
Non-consumption expenditure-6

Income-8
9703

Real consumption(CY quarterly basis, moving averagewith previous two quarters)

98

00

99

01

02

03

(CY quarterly basis)
1. Conversion into real figures uses composite consumer
price index excluding imputed rent.
2. Attribution to each component is based on the following
formula (all in real terms):∆C (factor) =α ･ ∆Y (income) – α ･ ∆T (nonconsumption expenditure) +∆α ･ (Y – T ) (consumption
propensity)
C : consumption expenditure, Y: income, T : nonconsumption expenditure,α: consumption propensity
Sources : Ministry of Public Management, Home Affairs, Posts andTelecommunications, “Family Income and Expenditure
Survey” (worker’s households), and “Consumer Price Index.”
Notes :

1. Seasonally adjusted annual rate.
2. Data since January-March 2000 are calculated with the newquick estimate method. Growth rates for the periods prior
to the change in calculation method are on a confirmed
information basis. The levels of consumption are calculated
retrogressively from the growth rates.
Source : Cabinet Office, “National Accounts,” second QE for JulySeptember 2003.
Notes :

− 37 −

Retail Sales Remain Weak, but Consumer Confidence Shows Signs of Recovery

Figure 2-15. New Car Registrations(seasonally adjusted)

Figure 2-14. Retail Sales Index(seasonally adjusted)(annual rate, 10,000 vehicles)

105

400
（1Q/97=100）

Householdmachines/appliances

380

1Q/97

360
100

Textiles, clothing, personal
items, foods and beverages

340
320
300

95
Retailindustry total

90(CY quarterly basis)

1Q/98

280

97
98
99
00
01
02
Note : Passenger cars including mini automobiles.
Source : Japan Automobile Dealers Association data.

03

Figure 2-16. Tourism Sales

85(change on previous year, %)80
Automobiles

80

60

Overseas tours

40

Internal tours

20(CY quarterly basis)

75
97

98

99

00

01

02

0
-20

03

-40
Note :

Retail sales index except for total represents the averageof published seasonally adjusted figures weighted
by the sales of each industry.
Source : Ministry of Economy, Trade and Industry, “Report of
the Current Survey of Commerce.”(CY quarterly basis)

-60

97
98
99
00
01
02
03
Source : Ministry of Land, Infrastructure and Transport,“Tourism Sales of 50 Major Tourist Agencies.”

Figure 2-17. Consumer Confidence Indicators(2) Quarterly change in consumer confidence index(seasonally adjusted)(1) Recent trend
180
Living Insecurity Index

160
140

(%)

6
4

120

Income growth

Price inflation

Willingness to buy durable goods

Employment

Consumer confidence index

2

Nikkei Consumption Forecast Index

100

Overall livelihood

80(CY quarterly basis)

0

60
97

98

99

00

01

02

03

Consumer confidence index is based on surveys forthe coming six months. Figures for individual components were redistributed from seasonally adjusted data.
Sources : Cabinet Office, “Consumer Confidence Survey;” Japan
Research Institute, “Consumer Sentiment Index;” Nikkei
Industrial Consumption Research Institute data.

-2

Note :-4(CY quarterly basis)

-6
97

−38 −

98

99

00

01

02

03

Plant and Equipment Investment Increasing, but Ratio to Cash Flow Still Subdued

Figure 2-18. Year-on-Year Change in Nominal Corporate
Plant and Equipment Investment and Investment Profitability
in Manufacturing Sector (corporations of all sizes)

Figure 2-19. Revisions to Plant and Equipment
Investment Plans for FY 2003
(change on previous year)
(%)

(％)

97/5

00/10

99/1

02/1

(％)

15

10

10

9

5

8

0

7

-5

6

-10

5

-15

4

Large manufacturers

20
10
0
-10
-20

2003

2000

(%)

Large non-manufacturers

20
10
0
-10
-20

-20

3
95

96

97

98

99

00

10

01
02
03
(CY quarterly basis)

0-10Contribution of non-manufacturing
Contribution of manufacturing
Year-on-year change in plant and equipment investment
Investment profitability in manufacturing (right scale)-20
PlannedSources:

Notes :

1.
2.

Sources :Plant and equipment investment excludes software.
Return on investment = operating asset-profit rate – average contracted interest
rates of banks (new loans, total), where operating asset-profit rate = operating
profit/(tangible fixed assets + inventories).
Ministry of Finance, “Quarterly Report of Statistical Survey of Incorporated
Enterprises,” etc.

Figure 2-20. Ratio of Plant and Equipment Investment toCash Flow (corporations of all sizes, moving averagewith 4 previous quarters)
110(%)
Manufacturing

ActualSurveys conducted by DBJ for large companies and by
Japan Finance Corporation for Small Businesses forsmall companies.

Figure 2-21. Year-on-Year Change in Capital
Stock by Industrial Sector

5100

Small manufactures

(%)

20

(%)

4

Non-manufacturing

3

90

2
80
1
70

0

60

Manufacturing
Net amortization rate in manufacturingNon-manufacturing

-1
-2

50
95

96

97

98

99

00

01

02

03

95

96

Note :

Capital stock at current term end = corresponding term-end
capital stock in the previous year + (investment in new
equipment + acquisition of used goods – gross retirement)in the recent four quarters.
Net retirement rate = (gross retirement – acquisitionof used goods)/capital stock in the previous quarter.
Cabinet Office, “Gross Capital Stock of Private Enterprises.”(CY quarterly basis)
Note :

Source :Cash flow is calculated with the formula: ordinary profits/2 +cost depreciation. The data represent the totals of plant andequipment investment in the recent four quarters divided by
the totals of cash flow in the recent four quarters (%).
Ministry of Finance, “Quarterly Report ofStatistical Survey of Incorporated Enterprises.”

Source :− 39 −

97

98

99

00

01
02
03
(CY quarterly basis)

Leading Indicators Showing Strength, Attention Focused on Corporate Profits

Figure 2-22. Trends in Leading Indicators and Actual Plant andEquipment Investment by Type of Goods
Machinery orders and investment in machinery(change on previous year)

Construction starts and investment in construction(change on previous year)

(%)

(%)

30

30

Investment inmachinery

20

20

10

10

0

0

-10

-10

-20

Floor area of construction
starts (private non-residential)

Investment inconstruction (real terms)-20
Machinery orders (private demand excluding
ships and electric power)-30
95

Notes :

Sources :

96

97

98

99

00

-30

01
02
03
(CY quarterly basis)

95

96

97

98

99

00

01
02
03
(CY quarterly basis)

1. Machinery orders for October-December 2003 represent estimates (simple aggregate basis).
2. Investment in machinery represents the residual of plant and equipment investment on a SNA basis after subtracting
construction investment and software investment, each estimated from relevant statistics.
Cabinet Office, “National Accounts” and “Orders Received for Machinery;” Ministry of Land, Infrastructure and Transport,“Integrated Statistics on Construction Work.”

Figure 2-23. Year-on-Year Change in Operating Profit/Loss by Component(corporations of all sizes in all industries)(%)

Actual (Quarterly Report)

100

(%)
16

Contribution of sales growth
Contribution of marginal profit ratio
Contribution of fixed costYear-on-year change in operating profit/loss

80
60

14
12
10

40

Planned (BOJ Tankan in September)
200of sales growth
Contribution
増収寄与
‑2000
Contribution of marginal profit ratio
限界利益率寄与
9500
Contribution of fixed cost
固定費寄与Year-on-year change in operating
営業損益前年同期比
profit/loss

8

20

6

0

4

-20

2

-40

(Domestic
demand)(Domestic
demand)

0

-60

-2

-80

-4
95

Note :

Sources :

96

97

98

99

00

01
02
03
(CY quarterly basis)(Exports)(Exports)

FY2003

1st half

2nd half

Attribution to each component is based on the following formula:operating profit/loss = sales (S)×marginal profit ratio (MPR) – fixed cost (FC).
The contributions of sales growth, marginal profit ratio and fixed cost are calculated as (∆S×MPR0), (∆MPR×S0) and ∆FC,
respectively, where ∆represent change on the previous year and 0 represents the value of the previous year.
Fixed cost = labor cost + cost depreciation.
Ministry of Finance, “Quarterly Report of Statistical Survey of Incorporated Enterprises;” Bank of Japan, “Short-term
Economic Survey of Enterprises in Japan (Tankan ).”−40 −Weak Residential Investment
Figure 2-24. Trend of Housing Starts(seasonally adjusted annual rate)(10,000 units)

Figure 2-25. Housing Starts(trend of year-on-year change bycomponent)

(%)

160
Owner-occupied houses
Company’s houses
系列5

140

Housing for rent
Housing for sale

5

120
100

-5

80
Housing for saleCompany’s houses
Housing for rent
Owner-occupied houses
Total

60
-15

40
20

(CY quarterly basis)(CY quarterly basis)

0

-25
97

98

99

00

01

02

03

97

98

99

00

01

02

03

Source : Ministry of Land, Infrastructure and Transport,“Building Construction Started.”

Source : Ministry of Land, Infrastructure and Transport,“Building Construction Started.”

Figure 2-26. Floor Area of Housing Starts(trend of year-on-year change by component)

Figure 2-27. Real Residential Investment(seasonally adjusted annual rate)( trillion yen)
28

(%)
10

26
0

24
22

-10
Housing for saleCompany’s houses
Housing for rent
Owner-occupied houses
Total

-20

20
18

(CY quarterly basis)(CY quarterly basis)

-30

16
97

98

99

00

01

02

97

03

Source : Ministry of Land, Infrastructure and Transport,“Building Construction Started.”

99

01

02

03

Figure 2-29. Contract Rate and Stock of
Condominiums (Kinki area)

(%)
100

(1,000 units)
8

(%)
100
Term-end stock

Term-end stock
Contract rate (right scale)

1000

Source : Cabinet Office, “National Accounts.”

Figure 2-28. Contract Rate and Stock of
Condominiums (Tokyo metropolitan area)(1,000 units)
12

98

90

7

Contract rate (right scale)

90

6
8

80

6

70

4

60

80

5

70

4
3

60

2
2

50
(CY quarterly basis)

0

40
97

98

99

00

01

02

50

1

(CY quarterly basis)
40

0

03

97

Note :

98

99

00

01

02

03

Contract rate refers to the quarterly average of the percentage of housing sales contracts that were actually closed from among
the total number of contracts started for any given month. Stock refers to the figure at the end of the quarter.
Source : Real Estate Economic Institute Co., Ltd.

− 41 −

Public Investment Falling due to Difficult Financial Situation
Figure 2-30. Trend of Public Investment

Figure 2-31. Trend of Contract Value for
Public Works(change on previous year, %)
25

(%)
10

(trillion yen)
55

20
9

50

Central

Local

Others

Total

15
45

8

40

7

35

6

10
5
0
-5

Public fixed capital formation30

5

As % of GDP (right scale)(CY quarterly basis)

25-10(quarterly basis)

(FY)

-15

4

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

91 92 93 94 95 96 97 98 99 00 01 02 03
Note : Data represent seasonally adjusted annual rate.
Source : Cabinet Office, “National Accounts.”

ⅡⅢⅣⅠⅡⅢ
02
03

Note :

Figure 2-32. Long-term Outstanding Debts ofCentral and Local Governments

In the legend, “Local” represents the total of prefecturesand municipalities. “Others” represent the total ofcentral and local public business entities.
Source : East Japan Construction Surety etc., “Public Works
Prepayment Surety Statistics.”(trillion yen)

Figure 2-33. International Comparison of
Financial Situations

800
700

(%)

600
160
140
120
100
80
60
40

500
400
300
200
100

(%)
10

0
-100

(FY)
91 92 93 94 95 96 97 98 99 00 01 02 03
Duplication
Debts of local governments
Debts of central government
Excluding special account for postal services and postal savings
Total

Notes : 1. Figures for fiscal 2002 represent estimates after
supplementary budget and those for fiscal 2003 are
estimates based on the initial budget.
2. The special account for postal services and postal
savings (outstanding debts of some ¥49 trillion asat the end of FY2002) was abolished at the end of
FY2002.
Source : Ministry of Finance, “Budgetary Data (March 2003).”

Japan

U.S.

EU15

(1) General government debts/Nominal GDP

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

5(2) Primary balance/Nominal GDP

0
-5
-10
(Calendar year)
1. Values for 2003 are estimates.
2. Figures for some European countries in 2000 include
income from the selling of cellular phone licenses (around
1% of the primary balance).
Source : OECD, “Economic Outlook 73 (June 2003).”
Notes :

−42 −

Signs of Recovery in Exports and Mild Increase in Imports

Figure 2-34. Trends of Real Effective Exchange
Rate (2000=100)
140

Figure 2-35. Japan’s Purchasing Power Parity
and Yen/Dollar Rate
(yen)

210
Purchasing power parity

190

130
Euro

120

Currency appreciation

U.S.

110
100
Japan

90
80

(Monthly basis)

70
97

98

99

00

01

02

115
Imports

105
100
95
90
85
(monthly basis)

75
98

99

00

01

110
90
70

(Calendar year)

90 91 92 93 94 95 96 97 98 99 00 01 02 03

Figure 2-36. Export and Import Volume Indices(2000=100)

80

130

03

Exchange rate is converted into real terms with the price levels of
the country and its 44 trading partners and then weighted for
trade in industrial products in 1990.
Source : J.P. Morgan, “World Financial Market.”Exports15050Note :

110

Yen/dollar rate

170

02

Values for 2003 represent those in May.
Note:
Source : OECD, “Purchasing Power Parities and Real Expenditure.”

Figure 2-37. Export Volume Index by Destination(change on previous year)

(%)
50
40
30
20
10
0
-10
-20
-30
-40
-50
-60

World

EU
U.S.
Asia

99

03

(CY quarterly basis)

00

01

02

03

Source : Ministry of Finance, “Trade Statistics.”

Note :
Seasonally adjusted values based on X-12.
Source : Ministry of Finance, “Trade Statistics.”

Figure 2-38. Export Shipment Index of Industrial
Goods (2000=100)

Figure 2-39. Import Supply Index for Industrial
Goods (2000=100)(seasonally adjusted change from previous quarter, %)(seasonally adjusted change from previous quarter, %)8Capital goods
Construction materials
Consumer durable goods
Consumer non-durable goods
Producer goods
Total

9
7
5

Producer goods
Consumer durable goods
Capital goods

6

Consumer non-durable goods
Construction materials
Total

4

3

2

1

0

-1
-2

-3

-4

-5
-7

(CY quarterly basis)

97

98

99

(CY quarterly basis)

-6
00

01

02

03

97

Source : Ministry of Economy, Trade and Industry, “Analysis of Industrial
Production Activities.”

98

99

00

01

02

Source : Ministry of Economy, Trade and Industry, “Analysis ofIndustrial Production Activities.”− 43 −

03

Deflation Continues but Slows

Figure 2-40. Trends in Commodity Prices and Corporate Goods Prices (domestic demand goods)(change on previous year, %)3(change on previous year, %)20

Final goods
Intermediate goods
Raw materials
Corporate goods prices (domestic demand goods)

2International commodities (excluding crude oil)(right scale)

15
10

1

5
0
0
-1
-5
-2

-10

-3

-15
(CY quarterly basis)

-4

-20
97

Note :
Sources :

98

99

00

01

02

03

Corporate goods prices represent the average of domestic and import prices for domestic demand goods.
Bank of Japan, “Price Indexes Monthly;” IMF, “International Financial Statistics.”

Figure 2-41. Trends in Consumer Prices (excluding fresh foods) andCorporate Service Prices(change on previous year, %)3Agricultural & aquatic products and industrial products
General services, etc.

2

Public services, etc.
Consumer price index (excluding fresh foods)
Corporate service price index

1

0

-1
(CY quarterly basis)

-2
97

98

99

00

01

02

“General services, etc.” include publications. “Public services, etc.” include electricity, gas and water charges.
Corporate service price index excludes ocean freight transportation, international airfreight transportation andinternational air passenger transportation.
Sources : Bank of Japan, “Price Indexes Monthly ;” Ministry of Public Management, Home Affairs,
Posts and Telecommunications, “Monthly Report on Consumer Price Index.”
Notes :

1.
2.

−44 −

03

Effect of Quantitative Easing Policy Yet to Materialize
Figure 2-42. Trends in Selected Interest Rates

Figure 2-43. Target of Guidance by Monetary Policy(¥ trillion)

(%)

2.0

(¥100 billion)

35

1.5

14,00030

12,00025

10,000

1.0

20

8,000

0.5

15

6,000

10

4,000

5

2,000

0

0

0.0
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10
00
01
02
03

3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9
01
02
03

Inter-bank overnight lending rate (unsecured)
Three-month CDs
Yield on 10-year government bonds
Average contracted interest rate on new loans
Average contracted interest rate on new loans is based on monthly
statistics. Others represent the monthly averages of daily closing
prices.
Sources : Nihon Keizai Shimbun; Bank of Japan, “Financial and Economic
Statistics Monthly.”(3/19) Guidance targetchanged to BOJ current
account balance

Note :(change on previous year, %)

35
30
25
20
15
10
5
0
-5

(times)13
12
11

Monetary base

97

98

Figure 2-46. Money Stock (M2+CD) by
Credit Component(change on previous year, %)
8
6

2

8

96

1. BOJ current account balance represents monthly averagebalance.
2. Government bond purchase operation represents the amountpurchased in the month.
Bank of Japan, “Financial and Economic Statistics Monthly.”

49Credit multiplier (right scale)95

Notes :

10

Money stock (M2+CD)

94

BOJ current account balance
Government bond purchase operation (right scale)

Source :Figure 2-44. Trends in Monetary Base andMoney Stock Rates(8/14) Target set forgovernment bond purchase
operation

99

00

01

02

7

0

6

-2

03

-4

(CY quarterly basis)-6
98

Figure 2-45. Velocity of Monetary Circulation

99

00

01

02

03

(CY quarterly basis)

1.0
Foreign assets
Lending to private sector
Decrease in other liabilities
Total

0.9
0.8
(CY quarterly basis)

0.7
94

95

96

97

98

99

00

01

02

03

1. Change on previous year in average balance.
2. Credit multiplier = (M2 + CD)/monetary base.
Velocity of circulation = nominal GDP/(M2 + CD)
Both seasonally adjusted.
Sources : Cabinet Office, “Annual Report on National Accounts;” Bankof Japan “Financial and Economic Statistics Monthly.”Notes :

Credit to the governments
Corporate bonds & shares
Others

Note :
Term-end balance.
Source : Research and Statistics Bureau, Bank of Japan, “Financial andEconomic Statistics Monthly.”− 45 −

III. A Medium-term Scenario for the Japanese Economy−Focusing on Money Flow and Finance−
Long-term Trends in Financial Surplus/Deficit and Outstanding Loans
Figure 3-1. Trend of Financial Surplus or Deficit by Sector(% of nominal GDP)
15

10
Surplus50-5Deficit-10
65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98
Corporate Business

Personal

Overseas

Government sector(FY)

1. Corporate Business includes moneylenders and some government-affiliated corporations, as well as private and public
non-financial corporations.
2. Personal includes proprietorships and non-profit organizations, as well as households.
3. Government sector represents the total of the central government, public corporations and local governments.
4. Adjustment is made between the government sector and incorporated enterprises for the discontinuity arising from the partial
assumption of the debts left over from the JNR Settlement Corporation and the National Forest Special Accounts in fiscal 1998.
Sources : Cabinet Office, “Annual Report of National Accounts” (68 SNA); Bank of Japan, “Flow of Funds,” (68 SNA).
Notes :

Figure 3-2. Trend of Outstanding Private Bank Loans(% of nominal GDP)
140
130
120
110

68SNA
93SNA

100
90
80
70
65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02(FY)

Notes :

1. Average outstanding loans of banks, etc. (total of domestic banks, Japanese branches of foreign banks, financial institutions
related to agriculture/forestry/fisheries and those for SMEs) for each period (initial value + term-end value/2) divided bynominal GDP.
2. 93 SNA offsets the assets and liabilities of loans provided by private financial institutions.
Sources : Cabinet Office, “Annual Report on National Accounts;” Bank of Japan, “Flow of Funds.”−46 −Changing Flow of Funds in Japan since 1990
Figure 3-3. Changing Flow of Funds in Japan since 1990
(end FY1990 – end FY1996 – end FY2002)(¥trillion)

48-78-72 (Housing loans: 44 –72-66)

Households(including
proprietorships)

145-103-72

188-326-359

652-797-853(Postal savings: 136 – 224 –
232)

210-238-250(Deposits: 328 – 410 – 503)

(Proprietorship loans: 104 – 107 – 90)(Housing loans: 66 – 90 – 117)
(Consumer credit: 34 – 37 – 37)

Postal Savings, Postal
Life Insurance, public
pensions

Private financial
institutions

14-11-42

14-19-50

Bank of Japan

259-457-501(Central government
securities: 9 – 40 – 158)

(Deposit with Bank ofJapan: 5 – 4 – 31)

33-55-92

142-157-173(Outward investment
in securities: 52 – 67
– 100)(Central government securities: 11 – 33 – 81)(Local bonds: 5 – 16 – 20)

Government, public
corporations, Fiscal Loan
Fund

134-199-355(Central government securities: 69 – 109 – 192)
(Local government securities: 13 – 28 – 35)(Loans: 20 – 29 – 51)(Financial bills: 21 –23 – 48)

630-591-455
19-28-35

81-135-116

Government financial
institutions(Loans: 439 – 420 – 299)

37-57-47

Private nonfinancial
corporations

80-84-66
10-16-18

Overseas

1. Figures indicate the trend of term-end financial asset-liability balance (at market prices). (The direction of arrows indicates asset holding.
Figures indicate values at the end of March 1991, the end of March 1997 and the end of March 2003 from left to right.)
2. The definition of each sector is based on Flow of Funds.
3. “Private financial institutions” include all financial institutions except the Bank of Japan, Postal Savings, Postal Life Insurance andpublic financial institutions.
4. “Government financial institutions” include the Industrial Investment Special Account, the Special Account for Financing Urban
Development and other government-affiliated corporations involved in finance intermediation as principal business (Social Welfare andMedical Service Corporation, Japan Scholarship Foundation, etc.), as well as the two government banks and six government financial
corporations.
5. Some assumptions are used in the estimation. The values have substantial margins of error.
6. Figures in italics are based on Flow of Funds and other statistics published by the Bank of Japan and are included in the corresponding
figures in romans.
7. Public pension is included in household assets.
8. The Figure only shows relations between major sectors and therefore is not exhaustive.
Sources : Compiled by DBJ Economic & Industrial Research Department from Bank of Japan, “Flow of Funds” (93 SNA) and various financial
statements.
Notes :− 47 −

Background of Medium-term Scenario
Figure 3-4. Trend of Real GDP Growth by Demand Component
Forecast(Change on previous year, %)

8
7
6
5
4
3
2
1
0
-1
-2

(FY)

-3

81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Private consumption

Private non-resiential investment

Government consumption

Public investment

Private residential investment

Exports

Imports

GDP

Note :
Sources :Forecast by DBJ Economic & Industrial Research Department based on Cabinet Office Estimates “Fiscal 2003 Economic
Trend Estimates” for fiscal 2003, and on Cabinet Office Background Paper for fiscal 2004 and onwards.
Compiled by DBJ Economic & Industrial Research Department from Cabinet Office, “Annual Report on National Accounts
and Cabinet Office Background Paper (submitted to Council of Economic and Fiscal Policy on January 20, 2003).

Figure 3-5. Comparison of Projected Economic
Growth and Prices

Figure 3-6. Assumption of Interest Rates

Projected Economic Growth

Forecast(%)

8(Change on previous year, %)

2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0

7
6
Cabinet Office Estimates (January
2002)
DBJ estimates (December 2002)

5

Present report4
3

Projected Rise in GDP Deflator(Change on previous year, %)

2
1

2.0

0

1.0

90

0.0
-1.0

92

94

96

98

00

02

04

06

Note :
Yields on 10-year government bonds.
Source : Cabinet Office Background Paper.

-2.0
-3.0
02

03

04

05

06

07

08

09

10
(FY)

Notes :

1. DBJ estimates (December 2002) represent the assumption made in DBJ Research Report No. 36.
2. Cabinet Office Estimates (January and September 2003) are reflected in the present report.
Sources : Compiled by DBJ Economic & Industrial Research Department from Cabinet Office Background Paper, etc.

−48 −

08

10
(FY)

Medium-term Outlook of Financial Surplus/Deficit by Sector
Figure 3-7. Nominal GDP – Trend by Demand Item
150

Forecast(FY1990 = 100)

140
130
120
110
100
90
80
70
60

Private consumption + residential investment
Private non-residential investment + inventory investment
Government consumption + public investment + public inventory investment

50

(FY)

40
80

82

Note :
Source :

84

86

88

90

92

94

96

98

00

02

04

06

08

10

Forecast by DBJ Economic & Industrial Research Department for FY2003 and onwards.
Cabinet Office, “Annual Report on National Accounts.”

Figure 3-8. Financial Surplus or Deficit by Sector
Forecast(% of nominal GDP)
10
8
Surplus

6
4
2
0
-2
-4
-6

Deficit

-8
(FY)

-10
90

91

92

93

94

95

Households
General government
Others

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

Private nonfinancial corporations
Overseas

Notes :

1. Where actual data are available, financial surplus or deficit in each sector according to Flow of Funds is divided bynominal GDP. For fiscal 2003 and onwards, forecast is made by DBJ Economic & Industrial Research Department basedon the Cabinet Office Background Paper.
2. By definition, financial surplus or deficit equals the savings-investment differential, but it is not actually the case due tostatistical errors. It is assumed that financial surplus or deficit will be equal to the savings-investment differential in fiscal
2003 and onwards.
3. “Others” represents the total of financial institutions, public non-financial corporations and private nonprofit institutions.
4. Adjustment is made between “general government” and “others” for the discontinuity arising from the partial assumption of
the debts left over from the JNR Settlement Corporation and the National Forest Special Accounts in fiscal 1998.
Sources : Cabinet office, “Annual Report on National Accounts,” (93 SNA); Bank of Japan, “Flow of Funds,” (93 SNA); Cabinet
Office Background Paper.

− 49 −

Private Business Sector to Maintain Financial Surplus
Figure 3-10. Trends in Financial Surplus or
Deficit of Private Non-financial Corporations

Figure 3-9. Private Non-Residential Investment of
Private Corporations as Percentage of GDP
21
20
19
18
17
16
15
14
13

Forecasts(%)

Forecasts(% of nominal GDP)

20
15
10
5
0
-5
-10

(FY)
90

92

94

96

98

00

02

04

06

08

(FY)

-15

10

90

92

94

96

Real private non-residential investment

Notes :

1. Forecast by DBJ Economic & Industrial Research
Department for fiscal 2003 and onwards.
2. Includes the finance/insurance industry, proprietorships and non-profit organizations, as well as private
non-financial corporations.
Source : Cabinet Office, “Annual Report on National Accounts.”

Repayments

02

04

06

08

10

Note :“Cash flow” represents “savings” of the sector in Annual
Report on National Accounts.
Sources : Compiled by DBJ Economic & Industrial Research
Department from Cabinet Office, “Annual Report on
National Accounts” and Bank of Japan, “Flow of Funds.”

Figure 3-11. Trends in Financing andRepayments by Private Non-financial
Corporations

Figure 3-12. Corporate Asset Mobilization

Forecasts(¥ trillion)

00

Plant and equipment investment
Cash flow
Financial surplus or deficit

Nominal private non-residential investment

80
70
60
50
40
Financing
30
20
10
0
-10
-20
-30
-40
-50

98

(¥ trillion)

7

Deposits money

6

Trade credits

5
4
3
2
1

(FY)
90

92

94

96

98

00

02

04

06

08

0

10

93

94

95

96

97

98

99

00

01

02

(End of FY)

OthersTrade credits and foreign trade credits
Shares and other equities
Debentures and commercial papers
Borrowings from private financial institutions
Financial deficit
Total

Note :
Amount of underlying credits soled to SPC.
Source : Bank of Japan, “Flow of Funds.”

Notes :

1. Profit or loss from the valuation of shares and other equities is
not taken into account.
2. Inter-business and trade credits represent assets net of liabilities.
Thus, any rise in credit offering works to increase financing.
Source : Compiled by DBJ Economic & Industrial Research Department fromBank of Japan, “Flow of Funds.”−50 −Household Savings Ratio to Decline, Reducing Share of Cash and Deposits
Figure 3-13. Forecast of Household Savings Ratio
16

Figure 3-14. Forecast of Real Private Residential
Investment

Forecast(%)

30

Forecast(¥ trillion)

12
25

8
20

4

0

15

90

92

94

96

98

00

02

04

06

08

10

90

92

94

96

98

00

02

04

06

(FY)
Source :Cabinet Office, “National Accounts.”

Source :Figure 3-15. Forecast of Financial Assets in
Households
100
90
80
70
60
50
40
30
20
10

1,600
Trend of financial asset value
in case of rise in asset prices

1,500

10
(FY)

Cabinet Office, “National Accounts.”

Figure 3-16. Forecast of Financial Asset
Composition in Households

Forecast(¥ trillion)

08

1,400
1,300
1,200
1,100

Forecast

(%)

0

1,000
90

92

94

96

98

00

02

04

06

08

10

(End of FY)
Note :
Share prices are assumed to rise slowly.
Sources : Cabinet Office, “National Accounts;” Bank of Japan,“Flow of Funds.”

90

95

00

Cash and demand deposits
Insurance and pension reserves
Securities (excluding bank debentures)
Investment trusts

Notes :

02

05

10(End of FY)

Term deposits
Bank debentures
Stocks系列4

1. “Cash and demand deposits” includes foreign
currency deposits, money deposited, receivables
and payables, as well as cash and floating deposits.
2. Share prices are assumed to rise slowly.
Sources : Bank of Japan, “Flow of Funds;” Ministry of Public
Management, Home Affairs, Posts and Telecommunications, “National Survey of Family Income andExpenditure;” National Institute of Population and Social
Security Research, “Households Projections for Japan.”− 51 −

Primary Balance to Improve despite Further Increase in Government Debts
Figure 3-17. Public Investment
and Government Consumption(¥trillion)

120

Figure 3-18. Trends in Financial Surplus/Deficit
and Primary Balance

Forecast

4(% of GDP)
Financial surplus ordeficitPrimary balance

Government consumption

100

2

Public Investment

Forecast

0

80

-2
60
-4
40

-6

20

-8
(FY)

0
90

92

94

96

98

00

02

04

06

08

(FY)

-10

10

90

Forecast by DBJ Economic & Industrial Research
Department for fiscal 2003 and onwards.
Source : Cabinet Office, “Annual Report on National Accounts.”

Notes :

Note :

96

98

00

02

04

06

08

10

Figure 3-20. Trends in Central and Local
Government Bonds by Holder(¥ trillion)(¥ trillion)

900

700
Local government bonds
Debts on Special Account for Tax Allocations
Straight central government bonds
Public bonds

700

94

1. “Financial surplus or deficit” is on a general
government basis.
2. “Primary balance” represent the total of central andlocal governments.
3. Adjustment is made for the discontinuity arisingfrom the partial assumption of the debts left overfrom the JNR Settlement Corporation and the National
Forest Special Accounts in fiscal 1998.
Sources : Cabinet Office, “Annual Report on National Accounts;”
Bank of Japan, “Flow of Funds;” Cabinet OfficeBackground Paper; Ministry of Finance data.

Figure 3-19. Trends in Outstanding Public
Bonds
800

92

600
500

600
500

400

400

300

300

Overseas
Private non-financial sector
Private financial institutions
Other government sector
Fiscal Loan Fund
Postal Savings
Bank of Japan
Total

200

200
100

100

0

0
90

92

94

96

98

00

02

04

90 91 92 93 94 95 96 97 98 99 00 01 02

06 08 10(End of FY)(End of FY)

Note :

Values for fiscal 2003 represent initial budget amounts
Note :
Central government bonds include fiscal loan bonds.
or estimates in Ministry of Finance data or Ministry
Source : Bank of Japan, “Flow of Funds.”of Public Management, Home Affairs, Posts andTelecommunications data. Values for fiscal 2004 andonwards are based on Cabinet Office Background Paper.
Sources : Ministry of Finance data; Ministry of Public Management,
Home Affairs, Posts and Telecommunications data;
Cabinet Office Background Paper.

−52 −Current and Future Behavior of Private Financial Institutions
Figure 3-21. Trends in Assets Held by Private Financial Institutions
Change in assets

Composition of assets
Forecast

(%)
100

200

80

150

Others100

Shares and other equities
Outward investment

Outward investment50

Derivatives

0

Government sector bonds

Government sector bonds-50

Appraisal loss on loans

Loans

-100

Flow of loans

OthersShares and other equities

60
40
20

Cash and deposits

0
3/91

3/97

3/03

Forecast(¥ trillion)

Derivatives

Cash and deposits

-150

3/11

Change in assets

3/91→3/97 3/97→3/03 3/03→3/11

Figure 3-22. Loans to Non-financial Sector
Composition ofoutstanding loans

Change inoutstanding loans
Forecast(%)(¥ trillion)

Forecast

100

100

80

50

Others0

Individuals

60

Others40

Individuals

-50

20

Public sector-100

Private corporations

0
3/91

3/97

3/03

Public sector
Privatecorporations
Total

-150
3/91→3/97

3/11

3/97→3/03

3/03→3/11

1. For the purpose of this section, private financial institutions refer to “bank, etc.” in Flow of Funds. They include
Japanese branches of foreign banks, financial institutions related to agriculture, forestry and fisheries and those for SMEs,
as well as domestic banks.
2. “Government sector bonds” represent the total of financial bills, government bonds/fiscal loan bonds, local bonds andagency securities.
3. Share prices are assumed to rise slowly.
Source : Bank of Japan, “Flow of Funds.”

Notes :

Figure 3-23. Spreads Setting by Rating
90(“increase” – “decrease,” percentage points)

Low ratings

60
30

Medium ratings

0
High ratings

-30
1
01

4

7

10

1
02

4

7

10

1
03

4

7

10

18
16
14
12
10
8
6
4
2
0

Figure 3-24. Outstanding Commitment Line
Contracts(¥ trillion)

Ⅰ
01(Survey months)

Ⅱ

Ⅲ

Ⅳ

Ⅰ
02

Ⅱ

Ⅲ

Ⅳ

Ⅰ
03

Ⅱ

Ⅲ

(End of quarter, CY)

Note :

In principle, domestic long-term bonds rated
AAA-BBB = high rating, BB-B = medium rating,and CCC or under = low rating.
Source : Bank of Japan “Senior Loan Officer Opinion Survey
on Bank Lending Practices at Large Japanese Banks.”

Note :

Covers city banks, long-term credit banks, trust banks,regional banks and regional banks II.
Source : Bank of Japan, “Financial and Economic Statistics Monthly.”− 53 −

Appendix 1 Trends in Public Finance
Figure 3-25. Outstanding Loans of Government Financial Institutions(two banks and six financial corporations)

160

Trend of outstanding loans(¥ trillion)

Change in outstanding loans(on previous year)(¥ trillion)

15

140
10

120
100

5

80
0

60
40

-5

20
-10

0

91

90 91 92 93 94 95 96 97 98 99 00 01 02

92

93

94

95

(End of FY)
DBJNational Life Finance Corporation
Japan Finance Corporation for Small Businesses
Others
Notes :

Source :

97

98

99

00 01 02
(End of FY)

JBIC
Housing Loan Corporation
Japan Finance Corporation for Mutual Enterprises
Total

1. Until fiscal 1998, figures for DBJ and NLFC represent the total of Japan Development Bank and Hokkaido-Tohoku Development FinancePublic Corporation and the total of People’s Finance Corporation and Environmental Sanitation Business Finance Corporation, respectively.
2. Figures for JBIC represent those of Export-Import Bank of Japan until fiscal 1998, and those of international finance account since
fiscal 1999.
3. Others represent the total of Agriculture, Forestry and Fisheries Finance Corporation and Okinawa Development Finance Corporation.
Bank of Japan, “Financial and Economic Statistics Monthly.”

Figure 3-27. Share of Borrowings from Public
Financial Institutions in Liabilities

Figure 3-26. Trends in Public Loans
by Borrower400

96(¥ trillion)

30

(%)

350

Public sector

25

300
250

20

200
150

Households

15

100
10

50

Private non-financial corporations

0

5

90 91 92 93 94 95 96 97 98 99 00 01 02
OthersOverseas
Government
Housing loans
Households (excluding housing loans)
Public corporations
Private corporations
Total

Notes :

Source :(End of FY)

0
90 91 92 93 94 95 96 97 98 99 00 01 02(End of FY)

1. In Flow of Funds, lending by public financial institutions include
loans granted by Fiscal Loan Funds, Industrial Investment Special
Account, Special Account for Financing Urban Development,
some other government-affiliated corporations, Postal Savingsand Postal Life Insurance, as well as by the two banks and six
financial corporations.
2. Excludes loans for Postal Savings and government-affiliatedfinancial institutions.
3. “Government” represents the total of central and local
governments.
Bank of Japan, “Flow of Funds.”−54 −Notes :

Source :1. Share of borrowings from public financial institutions
represents the ratio of borrowings from public financial
institutions to financial liabilities (excluding stocks andinvestments) in each sector.
2. “Public sector” represents the total of central and local
governments and public non-financial corporations.
Bank of Japan, “Flow of Funds.”

Appendix 2 International Comparison 1: Financial Surplus/Deficit by Sector

Figure 3-28. Financial Surplus or Deficit by Sector
Japan
10

U.S.
(% of nominal GDP)(% of nominal GDP)

6
Surplus86

Surplus 4

4

2

2

0

0
-2

-2
-4

-4
Households
Nonfinancial BusinessGovernment
Overseas

-6
-8
-10
92

93

94

95

96

97

Households
Nonfinancial BusinessGovernment
Overseas-6
Deficit -8
98

99

00

01

92

02

93

94

95

96

97

98

99

00

(FY)

Germany(% of nominal GDP)

Surplus

01 02
(CY)

U.K.

(% of nominal GDP)

10

DeficitSurplus

8
6

5

4
2

0

0
-2

-5

-4
Households
Nonfinancial BusinessGovernment
Overseas

-10
-15
92

93

94

95

96

97

98

99

00

01

DeficitHouseholds
Nonfinancial BusinessGovernment
Overseas

-6
-8
-10

02
(CY)

92

93

94

95

96

97

98

99

00

01

Deficit

02(CY)

1. Movements in the German government and nonfinancial business sectors in 1995 is due to an extraordinary factor resulting fromthe integration into government’s general account of the debts of the Treuhandanstalt.
2. As regards Japan, adjustment is made for the discontinuity arising from the partial assumption of the debts left over from the JNR
Settlement Corporation and the National Forest Special Accounts in fiscal 1998.
Sources : Bank of Japan, “Flow of Funds;” Cabinet Office, “Annual Report on National Accounts;” U.S. Federal Reserve Board, “Flow of Funds
Accounts;” U.S. Department of Commerce, “Survey of Current Business;” Deutche Bundesbank, “Financial Accounts for Germany,”“Monthly Report of the Deutche Bundesbank;” National Statistics of U.K., “Financial Statistics,” “United Kingdom National Accounts.”
Notes :− 55 −

International Comparison 2: Nonfinancial Business Financing
Figure 3-29. Change in Nonfinancial Business Liabilities and Capital (market value)
Japan

U.S.

100%

100%

Others total

80%

80%

Stocks and investments

60%

60%

40%

40%

20%

20%

0%

0%

Non-stock securities
Borrowing

92

97

02 (End of FY)

92

Germany

97

02 (End of CY)

U.K.

100%

100%

80%

80%

60%

60%

40%

40%

20%

20%

0%

0%
92

97

02 (End of CY)

92

97

02 (End of CY)

Note :

Japan, the U.S. and the U.K. does not have a sector corresponding to insurance and annuity reserves. German insurance
and annuity reserves are included in “others total.”
Sources : Bank of Japan, “Flow of Funds;” U.S. Federal Reserve Board, “Flow of Funds Accounts;” Deutche Bundesbank, “Financial
Accounts for Germany;” National Statistics of U.K., “Financial Statistics.”

Figure 3-30. Change in Liabilities and Capital by Component(¥ trillion)

Japan
10000
8000
6000
4000
2000
0
-2000
-4000

100
0
-100
-200
-300
-400
93-97

1200

U.S.
Others total
Investments
Stocks (variance of estimate)
Stocks (flow)
Non-stock securities
Borrowings

93-97

98-02

Germany(EUR billion)($ billion)

98-02

U.K.
1500

900

(₤ billion)

1000

600

500

300
0

0
-300

-500

-600

-1000
93-97

98-02

93-97

Note :

98-02

93-97 indicates change in liabilities and capital from the end of 1992 to the end of 1997 and 98-02 indicate the change
from the end of 1997 to the end of 2002.
Sources : Bank of Japan, “Flow of Funds;” U.S. Federal Reserve Board, “Flow of Funds Accounts;” Deutche Bundesbank,“Financial Accounts for Germany;” National Statistics of U.K., “Financial Statistics.”−56 −International Comparison 3: Household Money Management
Figure 3-31. Change in Composition of Assets
Japan

U.S.

100%

100%

Others total

80%

80%

Insurance/annuity reserves

60%

60%

Stocks and investments

40%

40%

20%

20%

Non-stock securities
Cash and deposits

0%

0%
92

97

02

(End of FY)

92

Germany
100%

80%

80%

60%

60%

40%

40%

20%

20%

0%

0%
97

02

(End of CY)

U.K.

100%

92

97

92

02 (End of CY)

97

02 (End of CY)

Note :For the purpose of this section, Japanese households refer to the total of households and private non-profit organizations
serving households.
Sources : Bank of Japan, “Flow of Funds;” U.S. Federal Reserve Board, “Flow of Funds Accounts;” Deutche Bundesbank,“Financial Accounts for Germany;” National Statistics of U.K., “Financial Statistics.”

Figure 3-32. Change in Composition of Assets by Component
300

Japan

(¥ trillion)($ billion)

200

U.S.

12000

Others total

9000

Insurance/annuity reserves

6000

Stocks (variance of estimate)

100

Stocks (flow)

3000
0

0

-100

-3000
93-97

98-02

Investments
Non-stock securities
Cash and deposits

93-97

Germany
1000

98-02

U.K.

(EUR billion)

1200

800

(₤ billion)

900

600

600

400

300

200

0

0

-300

-200
93-97

98-02

93-97

Note :

98-02

93-97 indicates change in assets from the end of 1992 to the end of 1997 and 98-02 indicate the change
from the end of 1997 to the end of 2002.
Sources : Bank of Japan, “Flow of Funds;” U.S. Federal Reserve Board, “Flow of Funds Accounts;” Deutche Bundesbank,“Financial Accounts for Germany;” National Statistics of U.K., “Financial Statistics.”− 57 −

Appendix 3 Views on Medium-term Prospects for the Japanese Financial System
Factors facilitating transition to a market-oriented system
Baba and Hisada (2001)
Changing financial environment generates pressure on the Japanese financial system to move toward amarket-oriented system.
(Innovations in information technology, globalization, financial deregulation, changing household andcorporate demand for financial services)(See Note 1.)

I. Arguments for transition to a market-oriented financial system
Hoshi and Kashyap (1999)
The Japanese financial system will be transformed into a U.S.-style market-oriented financial system(process to be completed within 10 years).
・ An imbalance exists between the reduced dependence of large businesses on banks for financing
on the one hand, and the continued status of bank deposits as primary financial instruments forhouseholds on the other.
・ The completion of financial liberalization will transform the forms of Japanese savings and financing into a U.S.-style structure, undermining the supremacy of the banking sector.→Bank
loans will suffer a 30-50% decrease from the current level.

II. Arguments appreciating the current role of banks while recognizing the increased importance of a market-oriented financial system(1) Roundtable Committee on the Vision of the Japanese Financial System and Policies in the Future(2000)
Japan will need a double-linear financial system centered on market functions.
・ Wholesale: investment banking operations that respond to the demands of individual companies using sophisticated financial techniques.
・ Retail: coexistence of banks reviewing a huge number of financing applications mechanicallyat a low cost using the scoring system on the one hand, and banks conducting traditional
lending activities through individual reviews on the other.
・ Individuals: may participate in investment activities involving the selection of financial institutions, large sums of money and search for higher returns, if financial services are diversified
and their financial knowledge improves (See Note 2.)(2) Allen and Gale (2000)
Movements toward market-oriented financial systems are currently observed, such as the progressin the formation of a European single market with the launch of the EU and the financial big bangin Japan, but a trade-off relation exists between the two systems. No general conclusion can be
drawn as to which system is preferable.
(3) Ishida and Mio (2000)
Banks play a prominent role as providers of deposit currency, an important means of settlement.
・ Business-to-business EDI is fraught with the asymmetry of information between traders, whilee-money has security problems.

−58 −(Notes)
1. Innovation in information technology (1) allows the development of new financial instruments suchas MBS (mortgage-backed securities) and ABS (asset-backed securities), (2) expands e-commerce
and improves efficiency in market transactions and (3) enables the use of new lending techniquessuch as credit scoring, which quantifies corporate creditworthiness based on financial statements tomake judgments (see Institute for Monetary and Economic Studies, Bank of Japan (2001) for details). Some U.S. firms, such as Dun & Bradstreet, provide corporate information including indicators that quantify corporate risks using statistical techniques.
2. Allen and Santomero (1997) note that with the development of various financial instruments due toinnovations in information technology, households and businesses have to pay higher costs to understand financial products (participation cost).

References
Allen, F. and D. Gale. 2000. “Comparing Financial Systems,” MIT Press.
Allen, F. and A. Santomero. 1997. “The Theory of Financial Intermediation,” Journal of Banking
and Finance, 21.
Baba, N. and T. Hisada. 2001. “Japan's Financial System: Its Perspective and the Authorities' Rolesin Redesigning and Administering the System,” IMES Discussion Paper, No.2002-E-1.
Financial Service Agency, The 9th Meeting of Roundtable Committee on the Vision of the Japanese
Financial System and Policies in the Future. 2002. “The Vision for the Future of the Financial
System and Policy. ”
Hoshi. T. and A. Kashyap. 1999. “The Japanese Banking Crisis: Where Did it Come from and How
will it End?” NBER Macroeconomics Annual.
Institute for Monetary and Economic Studies (IMES), Bank of Japan. 2001. “Technological Innovation and Banking Industry/Monetary Policy: Forum on the Development of Electronic
Payment Technologies and Its Implications for Monetary Policy – Report,” Monetary andEconomic Studies, Vol. 19, No. 3, November, IMES.
Ishida, K. and H. Mio. 2000. “Wagakuni Ginko-gyo no Shorai-zo: Yokin Tsuka Juyo karano Approach niyoru Macro-teki Size no Kento (Vision of the Japanese Banking Sector in the Future: An Examination of its Macroeconomic Size Approached from Demand for Deposit
Currency),” Monetary and Economic Studies, Vol. 19, No. 2, Institute for Monetary andEconomic Studies (IMES), Bank of Japan.

− 59 −

List of Back Numbers (Including JDB Research Report)
No. 44 Recent Trends in the Japanese Economy: A Medium-term Scenario for the Japanese Economy with
Special Focus on the Flow of Funds and Finance (this issue)
No. 43 Survey on Planned Capital Spending for Fiscal Years 2002, 2003 and 2004 (Conducted in August 2003),
November 2003
No. 42 Promoting Corporate Measures to Combat Global Warming: An Analysis of Innovative Activities in the
Field, September 2003
No. 41 Prospects and Challenges for End-of-Life Vehicle Recycling, May 2003
No. 40 Survey on Planned Capital Spending for Fiscal Years 2002 and 2003 (Conducted in February 2003),
May 2003
No. 39 China’s Economic Development and the Role of Foreign-Funded Enterprises, May 2003
No. 38 Decline in Productivity in Japan and Disparities Between Firms in the 1990s: An Empirical Approach
Based on Data Envelopment Analysis, March 2003
No. 37 Trends in Socially Responsible Investment: Corporate Social Responsibility in a New Phase, March
2003
No. 36 Recent Trends in the Japanese Economy: A Medium-term Scenario for the Sustainability of the Japanese Economy, February 2003
No. 35 Concerns for the Future and Generational Consumption Behavior, February 2003
No. 34 Prospects and Challenges Surrounding Japan’s Electrical Equipment Industry: General Electrical
Equipment Manufacturers’ Restructuring of Operations and Future Prospects, November 2002
No. 33 Survey on Planned Capital Spending for Fiscal Years 2001, 2002 and 2003, November 2002
No. 32 Behavior Trends of Japanese Banks toward the Corporate Sector and Their Impact on the Economy,
October 2002
No. 31 Microstructure of Investment and Employment Dynamics: Stylized Facts of Factor Adjustment Basedon Listed Company Data, October 2002
No. 30 Recent Trends in the Japanese Economy: Globalization and the Japanese Economy, August 2002
No. 29 Corporate Financing Trends in Recent Years: Fund Shortages and Repayment Burden, August 2002
No. 28 Urban Renewal and Resource Recycling: For the Creation of a Resource Recycling Society, July 2002
No. 27 Labor’s Share and the Adjustment of Wages and Employment, June 2002
No. 26 Survey on Planned Capital Spending for Fiscal Years 2001 and 2002, May 2002
No. 25 Environmental Information Policy and Utilization of Information Technology: Toward a Shift in Environmental Policy Paradigm, March 2002
No. 24 The Changing Structure of Trade in Japan and Its Impact: With the Focus on Trade in Information
Technology (IT) Goods, March 2002
No. 23 Microstructure of persistent ROA decline in the Japanese corporate sector: Inter-company disparities
and investment strategies, March 2002
No. 22 Recent Trends in the Japanese Economy: The Japanese Economy under Deflation and Prospects ofEvolution, February 2002
No. 21 Survey on Planned Capital Spending for Fiscal Years 2000, 2001 and 2002, December 2001
No. 20 Current Situation and Challenges for Cable Television in the Broadband Era, October 2001
No. 19 Recent Trends in the Japanese Economy: The Japanese Economy under Deflation, August 2001

No. 18 Introduction of a Home Appliance Recycling System: Effects & Prospects: Progress towards Utilisationof Recycling Infrastructure, June 2001
No. 17 Survey on Planned Capital Spending for Fiscal Years 2000 and 2001, June 2001
No. 16 Revitalization of Middle-aged and Elderly Workers in Japan’s Labor Markets: Requiring the Expansionof the Vocational Training Functions, March 2001
No. 15 Risk-Averting Portfolio Trends of Japanese Households, March 2001
No. 14 Consumption Demand Trends and the Structure of Supply: Focus on Retail Industry Supply Behavior,
March 2001
No. 13 Recent Trends in the Japanese Economy: Weakness of Current Economic Recovery and Its Background,
March 2001
No. 12 Empirical Reassessment of Japanese Corporate Investment Behavior: Features and Changes since the1980s, based on Micro-level Panel Data, March 2001
No. 11 Survey on Planned Capital Spending for Fiscal Years 1999, 2000 and 2001, October 2000
No. 10 Job Creation and Job Destruction in Japan, 1978-1998: An Empirical Analysis Based on EnterpriseData, September 2000
No. 9

Recent Trends in the Japanese Economy: Information Technology and the Economy, September 2000

No. 8

Trend of International Reorganization Affecting the Japanese Automobile and Auto Parts Industries,
June 2000

No. 7

Survey on Planned Capital Spending for Fiscal Years 1999 and 2000, June 2000

No. 6

Current Status and Future Perspective of the Japanese Remediation Industry: Technology and Market
for Underground Remediation, May 2000

No. 5

Recent Trends in the Japanese Economy: The 1990s in Retrospect, March 2000

No. 4

Destabilized Consumption and the Post-bubble Consumer Environment, February 2000

No. 3

The Slump in Plant and Equipment Investment in the 1990s: Focusing on Lowered Expectations, theDebt Burden and Other Structural Factors, January 2000

No. 2

Survey on Planned Capital Spending for Fiscal Years 1998, 1999 and 2000, November 1999

No. 1

Corporate Strategies in Japan’s Semiconductor Industry: Implications of Development in Other AsianCountries, November 1999_________________________________________________________________________________________JDB Research Report
No. 96 Recent Trends in the Japanese Economy: Focused on Fixed Investment and Capital Stock, August 1999
No. 95 Efforts to Protect the Natural Environment in the United States and Germany: Environmental Mitigation and Biotope Conservation, July 1999
No. 94 Survey on Planned Capital Spending for Fiscal Years 1998 and 1999, June 1999
No. 93 Towards the realization of ‘environmental partnership’: A survey of Japan’s environmental NPO sector
through comparison with Germany, June 1999
No. 92 The Impact of Demographic Changes on Consumption and Savings, March 1999
No. 91 Recent Research and Development Trends in Japanese Enterprises: Technology Fusion, March 1999
No. 90 Recent Trends in the Japanese Economy: Prolonged Balance Sheet Adjustment, January 1999
No. 89 Impact of Asset Price Fluctuations on Household and Corporate Behavior: A Comparison between Japan and the U.S., December 1998

No. 88 Survey on Planned Capital Spending for Fiscal Years 1997, 1998, and 1999, December 1998
No. 87 Foreign Exchange Rate Fluctuations and Changes in the Input-Output Structure, November 1998
No. 86 Structural Changes in Unemployment of Japan: An Approach from Labor Flow, November 1998
No. 85 Recent Trends in the Japanese Economy: Characteristics of the Current Recession, August 1998
No. 84 R&D Stock and Trade Structure in Japan, August 1998
No. 83 Survey on Planned Capital Spending for Fiscal Years 1997 and 1998, August 1998
No. 82 The Significance, Potential, and Problems of DNA Analysis Research: Establishing Public Acceptanceis Essential, May 1998
No. 81 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1996, 1997 and1998 Conducted in August 1997, March 1998
No. 80 Recent Trends in the Japanese Economy: Growth Base of the Japanese Economy, January 1998
No. 79 Information Appliances: The Strength of Japanese Companies and Tasks for the Future, January 1998
No. 78 Challenges and Outlook for the Japanese Machinery Industries: Impact of ISO14000 Series and Environmental Cost, January 1998
No. 77 Current Conditions and Issues of Computerization in the Health Care Industry: For the Construction of
a Health Care Information Network, January 1998
No. 76 Household Consumption and Saving in Japan, December 1997
No. 75 The Direction of Japanese Distribution System Reforms: Strengthening the Infrastructure to Support
Diverse Consumer Choices, November 1997
No. 74 Foreign Direct Investments by Japanese Manufacturing Industries and Their Effects on International
Trade, October 1997
No. 73 The Impact of the Changing Trade Structure on the Japanese Economy: With Special Focus on the Effects on Productivity and Employment, October 1997
No. 72 An Analysis of Foreign Direct Investment and Foreign Affiliates in Japan, August 1997
No. 71 Recent Trends in the Japanese Economy: Stock Replacement and New Demand as Aspects of Economic Recovery, August 1997
No. 70 Corporate Fundraising: An International Comparison, June 1997
No. 69 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1996 and 1997
Conducted in February 1997, May 1997
No. 68 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1996 and 1997
Conducted in August 1996, August 1997
No. 67 An International Comparison of Corporate Investment Behavior: Empirical Analysis Using Firm Data
from Japan, France and the US, April 1997
No. 66 Housing in the National Capital: Analysis of the Market for Housing using Micro Data, March 1997
No. 65 The Environment for Locating Business Operations in Major East Asian Cities, January 1997
No. 64 Direction of Reconstruction of Business Strategy in the Chemical Industry, January 1997
No. 63 Reflection on Discussions Concerning Regulation of the Electric Power Industry: Deregulation of theElectric Power Industry in Japan and Implication of Experiences in the United States, December 1996
No. 62 Current Status and Future Perspective of the Japanese Semiconductor Industry, November 1996
No. 61 A Breakthrough for the Japanese Software Industry?: Responsiveness to Users’ Needs is the key, October 1996

No. 60 Recent Trends in the Japanese Economy Focusing on the Characteristics and Sustainability of the Current Economic Recovery, September 1996
No. 59 Analysis of the Primary Causes and Economic Effects of Information: Related investment in the UnitedStates and Trends in Japan, August 1996
No. 58 Selected Summaries of Research Reports: Published in FY1995, June 1996
No. 57 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1995 and 1996
Conducted in February 1996, May 1996
No. 56 Recent Trends in the Japanese Economy, May 1996
No. 55 Issues Concerning the Competitiveness of the Japanese Steel Industry, February 1996
No. 54 Changes in the Financial Environment and the Real Economy, January 1996
No. 53 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1994, 1995 and1996 Conducted in August 1995, October 1995
No. 52 Current Economic Trends: Focusing on the Appreciation of the Yen and its Effects, October 1995
No. 51 Problems Concerning the International Competitiveness of the Petrochemical Industry, October 1995
No. 50 An Economic Approach to International Competitiveness, October 1995
No. 49 Selected Summaries of Research Reports Published in FY1994, July 1995
No. 48 Strategies for Improving the Efficiency of the Japanese Physical Distribution System: Part 2, July 1995
No. 47 Issues on International Competitive Strength of the Auto Industry, June 1995
No. 46 Problems Concerning the International Competitiveness of the Electronics and Electric Machinery Industry, June 1995
No. 45 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1994 and 1995
Conducted in March 1995, June 1995
No. 44 Strategies for Improving the Efficiency of the Japanese Physical Distribution System, March 1995
No. 43 Capital Spending Recovery Scenario Cycle and Structure, August 1994
No. 42 Progress of International Joint Development between Industrialized Countries on the Private Level,
May 1994
No. 41 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1993, 1994 and1995 Conducted in August 1994 , November 1994
No. 40 Selected Summaries of Research Reports Published in FY1993, June 1994
No. 39 Recent Trends in Japan’s Foreign Accounts, April 1994
No. 38 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1993 and 1994
Conducted in March 1994, April 1994
No. 37 Economic Zones and East Asia Prospect for Economic Activity Oriented Market Integration, December
1993
No. 36 Japanese Corporate Responses to Global Environmental Issues, December 1993
No. 35 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1992, 1993 and1994 Conducted in August 1993, September 1993
No. 34 Structure of Profit to Capital in the Manufacturing Industry, September 1993
No. 33 Comparison of the Japanese and The U.S. Labor Markets, October 1992
No. 32 The Relative Competitiveness of U.S., German, and Japanese Manufacturing, March 1993

No. 31 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1992 and 1993
Conducted in March 1993, April 1993
No. 30 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1991, 1992 and1993 Conducted in August 1992, December 1992
No. 29 Flow of Funds in the 80s and Future Corporate Finance in Japan, November 1992
No. 28 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1991 and 1992
Conducted in February 1992, April 1992
No. 27 An Analysis of Foreign Direct Investment in Japan, March 1992
No. 26 Projection of Japan's Trade Surplus in 1995: Analysis of Japan's Trade Structure in the 80s, February
1992
No. 25 Intra-Industry Trade and Dynamic Development of The World Economy, November 1991
No. 24 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1990, 1991 and1992 Conducted in August 1991, September 1991
No. 23 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1990 and 1991
Conducted in February 1991, March 1991
No. 22 Trends of the Petrochemical Industry and its Marketplace in East Asia, March 1991
No. 21 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1989, 1990 and1991 Conducted in August 1990, September 1990
No. 20 Deepening Economic Linkages in The Pacific Basin Region: Trade, Foreign Direct Investment andTechnology, September 1990
No. 19 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1989 and 1990
Conducted in February 1990, March 1990
No. 18 Petrochemicals in Japan, The US, and Korea an Assessment of Economic Efficiency, February 1990
No. 17 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1988, 1989 and1990 Conducted in August 1989, October 1989
No. 16 Impact of the EC Unification on Japan’s Automobile and Electronics Industries, August 1989
No. 15 Industrial and Trade Structures and the International Competitiveness of Asia’s Newly Industrializing
Economies, August 1989
No. 14 The Japan Development Bank Reports on Capital Investment Spending: Survey for Fiscal Years 1988
and 1989 Conducted in February 1989, March 1989
No. 13 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1987, 1988 and1989 Conducted in August 1988, September 1988
No. 12 Growing Foreign Investors’ Activities and the Future of Internationalization, September 1988
No. 11 Futures Tasks and Prospects for the Japanese Machine-Tool Industry, July 1988
No. 10 International Division of Labor in the Machine Industries Among Japan, Asia’s NICs and ASEANCountries, June 1988
No. 9

Trends of the Petrochemical Industry and its Marketplace in East Asia around Japan, May 1988

No. 8

The International Competitiveness of Japan and U.S. in High Technology Industries, April 1988

No. 7

The Japan Development Bank Reports on Private Fixed Investment in Japan, March 1988

No. 6

Economic Projections of the Japan’s Economy to the Year 2000, February 1988

No. 5

The Japan Development Bank Reports on Private Fixed Investment in Japan, September 1987

No. 4Current Trends in the Japanese Auto Parts Industry in Overseas Production, July 1987

No. 3

Current Moves for Foreign Direct Investment into Japan, May 1987

No. 2

Overseas Direct Investments by Japanese Corporations, May 1987

No. 1

Current U.S. Consumption Trends, May 1987