Development Bank of Japan
Research Report
No. 48

Recent Trends in the Japanese Economy:
Medium-term Outlook of Japanese Industrial
Structure

January 2005

Economic and Industrial Research Department
Development Bank of Japan

This report was originally published in Japanese as Chosa No. 72
in December 2004.

Contents
Summary ........................................................................................................................ iii
I

World Economy: Expansion Continues................................................................ 1 (Figures)
1. U.S. (1): Personal Consumption Slows, Business Investment Grows .............. 1 (25)
2. U.S. (2): Recovery in Production and Employment, Weak Share Prices andInterest Rates..................................................................................................... 1 (26)
3. European Economies: Recovery Underway ..................................................... 2 (27)
4. Economies of Major Asian Countries: Rapid Growth Led by Exports,
Slumping Consumption in Korea...................................................................... 2 (28)
5. China (1): Mild Slowdown in Investment......................................................... 3 (29)
6. China (2): Oil Consumption and Imports on the Rise ...................................... 3 (30)IIJapanese Economy: Steady Recovery Continues................................................. 5
1. Overview: World Economy Holds the Key to Sustained Recovery.................. 5 (31)
2. Employment Situation Improves as Job Offers Increase .................................. 6 (32)
3. Income Holds Steady, Retail Sales Bottoming Out as Consumer
Confidence Improves ........................................................................................ 7 (33-34)
4. Business Investment Increases in Manufacturing and Non-Manufacturing ..... 8 (35)
5. Residential Investment Stays Flat ..................................................................... 9 (36)
6. Constant Decline in Public Investment due to Financial Squeeze .................... 9 (37)
7. Exports Slow, Current Account Surplus Reaching Peak................................. 10 (38)
8. Trade Dependency Edges up as Relationship Strengthens between
Exports and Domestic Production ...................................................................11 (39)9. Import Prices and Corporate Prices on the Rise ..............................................11 (40)
10. Weakened Linkage between Consumer andCorporate Prices since Late 1990s .................................................................. 12 (41)
11. Easy Money Policy Continues ........................................................................ 12 (42)

III Medium-term Outlook of the Japanese Industrial Structure........................... 14
1. Changing Industrial Structure ......................................................................... 14 (43)
2. (Reference) International Comparison of Change in Industrial Structure ...... 14 (44)
3. Structural Change in Consumer Demand and Intermediate Input Promotes
Trend toward Service Economy...................................................................... 14 (45)
4. Change in Intermediate Input Structure .......................................................... 15 (46)
5. Consumption Structure Also Points to Trend toward Service Economy ........ 16 (47)
6. Changing Consumption Structure due to Aging ............................................. 17 (48)
7. Growth Factor by Industry as Observed in Growth Accounting (1)............... 18 (49)
8. Growth Factor by Industry as Observed in Growth Accounting (2)............... 19 (50)
9. Industrial Structure in 2020 (1) (Assumption of Potential Growth Rate) ....... 19 (51)
10. Industrial Structure in 2020 (2) (Real Output Basis) ...................................... 20 (52)
11. Industrial Structure in 2020 (3) (Employment Basis) ..................................... 22 (53)12. (Appendix 1) Expected Mobilization of Potential Labor Force in the Young,Female and Older Populations ........................................................................ 22 (54)13. (Appendix 2) Divergence on Preferred Type of Employment between
Employers and Unemployed Persons ............................................................. 23 (55)14. (Appendix 3) Increase in Part-time Employment in the Robust Service Sector,
Labor Movement Mostly Constrained within Industries ................................ 23 (56)Development Bank of Japan Research Report/ No. 48iAnalysts and Writers:
Atsuhito Kurozumi
Masato Kanauchi
Keiichiro Oda
Takanori Wada
Yosuke Kagabayashi
Yoshiaki Hachiya
Hiroko Iwaki

Overall supervision
Sections II-1, II-4, III-3, III-9, III-10 and III-11
Sections I-3 and II-11
Sections I-5 and I-6
Sections I-1, I-2, II-7, II-8, III-1, III-2, III-4, III-7 and III-8
Sections II-2, II-3, II-5, III-5 and III-6
Sections I-4, II-6, II-9, II-10, III-12, III-13 and III-14 (App. 1-3)This report is based on statistical data published by October 21, 2004.

ii

Development Bank of Japan Research Report/ No. 48

Recent Trends in the Japanese Economy:
Medium-term Outlook of Japanese Industrial Structure
Summary
I. World – The world’s major economies continue to recover, led by the U.S. and Asia.
The U.S. economy continues to expand.
Growth in personal consumption is now slowing
after serving as the engine of economic growth,
as the effect of tax reductions wanes. Instead,economic expansion is being driven by business
investment, which remains particularly strong in
information technology. Production is increasing,led by equipment. The employment situation is
also continuing to improve. Against this backdrop, the Federal Fund rate has been raised threetimes since June 2004. However, the number inwork is increasing less quickly, exerting downward pressure on long-term interest rates andshare prices. Although the influence of higher
crude oil prices is now being felt, core prices remain stable. Looking ahead, attention will befocused on the policy of the new administration,
crude oil prices and the huge current accountdeficit.
European economies are recovering gradually. The French and U.K. economies are growing strongly, fueled by domestic demand. Although the German economy is recovering gently
on the back of exports, consumption continues toslump as unemployment remains high. Official
interest rates remain low in the euro zone.
The major Asian economies are still growing rapidly, driven by exports. Consumption in
Korea is finally picking up after the prolonged
slump caused by sluggish growth of income andwidespread defaults on personal loans. In finance,
the central banks of Taiwan and Singapore haveshifted toward tighter monetary policy.
While the effect of cooling measures remains to be seen, strong growth continues in
China, led by fixed asset investment and private
consumption. The share of inland provinces in
fixed asset investment is rising. Although thetighter monetary policy is having an impact on
the money stock, prices are rising mainly for raw

materials and food.
China, with its rapid increase in oil demand,is making its presence felt in the world oil market, which is reportedly one of the causes of rising crude oil prices. This powerful oil demand of
China may not only constrain future economic
growth in China but also have a significant impact on global supply and demand, given that percapita income, and hence energy consumption, is
still considerably lower in China than in developed countries, and that the country has huge
potential for economic growth due to the sheer
size of its population.
II. Japan – The Japanese economy continues torecover as improvements in the corporate sector
begin to spill over to the household sector byeasing the employment situation. Although the
future of the Japanese economy closely depends
on the course of crude oil prices and the world
economy as a whole, the steady recovery looks
set to continue for some time thanks to the positive spillover effect described above.
On the supply side, production is picking up.
Inventories are still in the buildup phase and remain low overall. For some products such as
electronic devices, however, supply and demand
movements in the months ahead need monitoring
as inventories show signs of piling up. Activity
in the tertiary industry is slightly higher. Employment continues to be cut back in manufacturing, but the unemployment rate has been declining mainly in services, in which larger businesses are leading the recovery in the number of
employees. The income situation is almost unchanged.
On the demand side, consumption is risingslightly as consumer confidence improves in linewith the employment situation. Business investment is increasing in both manufacturing andnon-manufacturing, attesting to the broadening
scope of the recovery. Leading indicators also
point to strong business investment for sometime to come, particularly in manufacturing.

Development Bank of Japan Research Report/ No. 48iii

Residential investment remains flat, while public
investment has declined constantly. The current
account surplus has leveled off as exports slow
down after leading the economic recovery. In
recent years, the correlation between exports anddomestic production has been strengthening as
trade dependency grows again, thus implying thegrowing influence of trading partners’ economic
conditions on the Japanese economy.
Prices of corporate goods (domestic demand
products) are rising mainly for energy and materials, while consumer prices are still declining
somewhat as downward pressure continues fromindustrial products. A weakening of the linkage
between the two price indicators has been observed in recent years.
Looking at the financial side, the monetarybase is high as the Bank of Japan maintains its
quantitative easing policy, but the money stock
continues to grow slowly. The velocity of circulation of money is bottoming out. The decline inoutstanding private bank loans has eased recently.
III. Medium-term outlook of the Japanese industrial structure(1) Issues: This report analyses structuralchanges underway in Japan, such as reduced
labor supply, changing consumption structure and the shift to the service economy
and globalization of industrial structure.
Also taking into consideration the changing
structure of intermediate input, the analysis
presents projections for the medium-term
industrial and employment structures as abaseline scenario.
(2) Change in industrial structure since the1980s: As is the case with other developed
countries, the focus of the Japanese industrial structure has shifted toward the tertiaryindustries including services, in terms of
output, value added and the number ofworkers. The growth of the service sector islargely attributable to the changing structureof intermediate inputs including the advancement of outsourcing.
Although many industries contributed
to economic growth in the 1980s, the driving force of the Japanese economy has become concentrated since the 1990s on spe-iv

Development Bank of Japan Research Report/ No. 48

cific industries including services and electrical machinery. Indeed, the service sector
has almost single-handedly contributed to
employment growth since the 1990s. A lookat GDP growth by component reveals thatthe manufacturing sector has relied on therise in total factor productivity while the tertiary industries have maintained growth byinjecting more capital and labor. Since theexpected decrease in the workforce will
necessarily limit the factor-input growth as
seen in the tertiary industries, improving
productivity will become a prerequisite for
growth.
(3) Change in consumption structure: The consumption structure also reflects the shift toward the service economy, as 90% ofhousehold consumption is now allocated to
the non-manufacturing sector. Consumption-induced production has been accelerating, which means that the shift of consumption toward services boosts non-manufacturing production. Moreover, population
aging will drive service consumption
through increased spending on healthcare,
culture and recreation.
(4) Potential growth rates to 2020: Based on
official projections, the number of workers
will fall by 4 million by 2020. Business investment generally moves in parallel withthe total savings ratio which will decline
gradually as a decline is expected in thehousehold sector as aging progresses. Assuming such trends in labor and capital aswell as a similar pace of technological progress, and using growth accounting, the annual potential growth rate will decline toabout 1.5% on average by 2010, and to
1.0% by 2020.
(5) Projected industrial and employment structures in 2020: An input-output table may be
estimated by assuming the expected potential GDP growth rate, the change in consumption structure due to falling birth rate
and aging, and the changing structure of intermediate inputs due to globalization andthe trend toward the service economy.
Based on this input-output table, averageannual growth of gross real output will decline gradually to 1.7% by 2010, and to1.3% by 2020. The relatively strong growthof the non-manufacturing sector indicatesthat the industrial structure will continue tomove toward the service economy.
Based on estimations of real output ineach industry and the trend of labor productivity growth, it is calculated that demand
for labor will decline by about 4 million
persons from 2000 to 2020 in the manufacturing sector as a whole, which will be partially offset by an increase of some 2 million
in the non- manufacturing sector, particularly in services. On balance, this means a
net decrease of some 2 million workers in
all industries. The employment structure
will also shift toward the service economy
as the share of the tertiary industries is expected to increase from 66% to 78%.

Meanwhile, as mentioned earlier, labor
supply will decline by about 4 million people over the same period. Thus, a labor
shortage of over 2 million workers is expected as of 2020. Effective countermeasures are needed, such as improving productivity in services and other job-creating industries, raising the rate of participation in
the labor force particularly among women,
and closing various gaps in labor supply anddemand.
(As of October 27, 2004)
by the Economic Research Group(e-mail: report@dbj.go.jp)

Development Bank of Japan Research Report/ No. 48v

I World Economy: Expansion
Continues
1.

U.S. (1): Personal Consumption Slows,Business Investment Grows(see p. 25 for Figures)

The U.S. economy continues to expand. RealGDP in April-June 2003 (final estimate) grew
3.3% on the previous quarter (Figure 1-1), the11th consecutive quarter-on-quarter increase.
Consumer confidence is improving slightly
on the back of the brighter employment situationand increased income. However, the growth of
personal consumption has been slowing (Figure1-2). Regarding disposable income (Figure 1-3),
gross income is increasing but the positive effectof tax reductions is fading. Future developments
will largely depend on the effect of soaring crude
oil prices on personal consumption and possible
changes in policy after the presidential election
including tax hike.
The strong growth of corporate profits,
which was observed throughout 2003, has beenslowing since January-March 2004 largely due torising raw material prices (Figure 1-4). Higher
corporate profits, however, have boosted business investment since April-June 2003, particularly in information technology.
2.

U.S. (2): Recovery in Production and Employment, Weak Share Prices and Interest
Rates (see p. 26 for Figures)

Industrial production has been rising gradually
since July-September 2003 and has regained thepeak of 2000 (Figure 1-5). However, inventories
and shipments are both up over a year earlier, so
the inventory cycle seems to be at a mature stage.
By category of goods, equipment production has
been stronger than consumer goods production,reflecting the current demand situation of slower
consumption and buoyant business investment.
In parallel with the increase in production, capacity utilization in the manufacturing sector has
risen slightly, although the level remains low1.

The employment situation continues to improve. The number of employees has been increasing, led by services (Figure 1-6). Employment recorded monthly increases of over
200,000 for three consecutive months fromMarch to May 2004, leading to the change inmonetary policy since June. However, the average monthly increase in employment has fallen
below 100,000 since June, and the implied vulnerability of the economic recovery has depressed share prices and long-term interest rates.
Employment has declined gradually to the
mid-5% range.
In trade, imports continue to grow strongly,
reflecting the buoyant domestic economy ascompared with other countries. Combined withsoaring crude oil prices, this has widened thetrade deficit. Since the service balance surplus
has remained flat, the current account deficit has
also increased (Figure 1-7). As a percentage of
nominal GDP, the current account deficit rose toa record high of 5.7% in April-June 2004. Alongwith the increasing budget deficit, the dollar
could plunge.
As regards prices, the producer price index(PPI) and the consumer price index (CPI) bothrose faster over the previous year following the
hike in raw material prices including crude oil(Figure 1-8). However, the ripple effect of expensive crude oil on overall prices has been limited so far, as the core index – excluding energy
and food – remains relatively stable.
In finance (Figures 1-9 and 1-10), the Dow
Jones Industrial Average has hovered around
10,000 as share prices are influenced by various
factors such as the state of the domestic economy
including the employment recovery, rising tensions in the Middle East and the surge in crude
oil prices. In view of the rise in the number of
employees, the FRB raised the Federal Fund target rate in June, August and September 2004 by
0.25% each time to correct its excessive monetary easing policy. Thus, the target rate wasraised by 0.75% in total to 1.75%, and many expect the rate to exceed 2% by the end of the year.
However, long-term interest rates (distribution
rates of 10-year U.S. bonds) have already taken

1

The level of capacity utilization might not be accurate as
some consider that production capacity is overestimatedparticularly for information-related equipment (i.e. capacity

utilization rate may be biased downward).

Development Bank of Japan Research Report/ No. 48

1these factors into account and are starting tocome down due to concerns about the sustainability of the booming economy.
3.

European Economies: Recovery Underway (see p. 27 for Figures)

The euro zone economies are recovering slowly.
The real GDP of the EU25 grew 2.3% (annualized quarter-on-quarter growth in April-June
2004, the same applies to all GDP growth data inthis section), the fourth consecutive quarter ofincrease (Figure 1-11).
Looking at the economies of major European countries, the recovery extends across theboard, led by exports in Germany, and by domestic demand in France and the U.K.
The German economy is picking up. RealGDP growth stands at 1.9%, the fourth consecutive quarter of positive growth, led by strong exports as the appreciation of the euro has paused.
The greatest concern about the economic recovery is private consumption, which remains weak
due to persistently high unemployment (Figure
1-12 (1)).
Recovery has been stronger in the Frencheconomy with real GDP growing by 2.8%. Although net exports continue to decline, increases
in private consumption and fixed asset formation
are contributing to the economic recovery (Figure 1-12 (2)).
The U.K. economy also remains strong,with real GDP growing by as much as 3.6%.
Domestic demand continues to drive the economic growth as private consumption is still on
the rise, backed by the stable, low unemployment
rate (Figure 1-12 (3)).
Although the euro remains high against the
dollar due to the weakening dollar, the effective
exchange rate has been stable since mid last year
(Figure 1-13).
However, the employment situation in Germany and France has not improved, with unemployment at over 9% (according to the ILO
standard). Indeed, unemployment has become amajor issue particularly in Germany. In the U.K.,
on the other hand, employment has been supporting domestic demand, as the unemployment
rate remains steady at around 4% (Figure 1-14).
Prices in the euro zone are stable and rising2

Development Bank of Japan Research Report/ No. 48

by just over 2% despite the rise in primarycommodity prices as the currency remains strong(Figure 1-15). This has kept the official interest
rate at around 2%, although price inflation has
exceeded the reference value of the European
Central Bank (up 2% from the previous year). In
the U.K., however, the Bank of England raised
the official interest rate by 0.25% in June andagain in August 2004, as concerns mounted
about possible inflation due to rising house
prices and wages, bringing the official rate to4.75%.
4. Economies of Major Asian Countries(Korea, Taiwan and Singapore): Rapid
Growth Led by Exports, Slumping Consumption in Korea (see p. 28 for Figures)
The major Asian economies have grown rapidly
since the latter half of 2003, led by booming exports. Domestic demand is being boosted byconsumption and fixed capital formation in Taiwan and Singapore, which contrasts sharply withslumping consumption in Korea. Although prices
are generally rising due to higher crude oil prices,
differences in the scope of economic growth inindividual countries have led to differences instance of monetary policy. The following segment describes the situation in each economy.
In Korea, booming exports and fixed capitalformation contributed to the growth of 5.5% in
April-June 2004, despite slumping consumption(Figure 1-16). Major export items include semiconductors, mobile communication equipment
and automobiles. Exports remain strong to major
destinations including China, the EU and the U.S.
Fixed capital formation was led by construction
investment in January-March, and by business
investment in April-June. Consumption has
slumped since April-June 2003, mainly due tothe sluggish growth of income and the surge incredit card defaults. Real wage growth, which
has slowed since 2003, is starting to pick up(Figure 1-18). Credit card defaults remain highdespite falling in May 2004. Prices stabilized in
April-June 2003, only to rise sharply by 4.4% in
July 2004, largely due to oil prices (Figure 1-19).
Despite concerns about inflation pressure, theBank of Korea eased monetary policy further,lowering the overnight call rate by 0.5% in Au-

gust to 3.5%, in view of sluggish consumption
and slowing exports in the latter half of the fiscal
year.
Rapid economic growth continues in Taiwan (Figure 1-16), fueled by domestic demand
including consumption and fixed capital formation. The strong fixed capital formation is largely
due to the construction of LC panel plants. The
deflationary trend stopped and prices started torise again in January-March 2004. With the expectation of strong growth in the months ahead
and rising inflation due to oil prices, the Central
Bank of China (Taiwan) raised the official discount rate by 0.25% in October.
Likewise, Singapore’s economy continued
its rapid growth in April-June 2004 led by domestic demand (Figure 1-16). Out of inflation
worries, the central bank (MAS) is maintaining
its tight monetary policy adopted in April tomitigate the slight appreciation of the Singapore
dollar.
5.

China (1): Mild Slowdown in Investment(see p. 29 for Figures)

Real GDP grew 9.8% in April-June 2004, far
exceeding for the second consecutive quarter theannual target of 7% announced at the National
People’s Congress in March2 (Figure 1-21). Rising fixed asset investment has helped sustain thispowerful growth.
The growth of fixed asset investment inApril-June declined slightly from the previous
quarter but still increased by as much as 31.0%
on the previous year (Figure 1-22). The composition of fixed asset investment in April-Juneshows a respite in iron/steel, chemical and otherindustrial facility investment, which made apositive contribution in the previous quarter. Instead, infrastructure investment including realestate, electricity, gas & water and transportation
has grown strongly. By region, investment
growth is faster in the central and western provinces than in the eastern provinces (coastal area),reflecting the growing importance of inland areas(Figure 1-23).
2

In its most recent announcement, the National Bureau of
Statistics of China revised upward its GDP growth estimate
for April-June 2003 from 6.7% to 7.9%.

Consumption increased substantially on theprevious year in April-June on the back of strong
personal spending on IT equipment and in reaction to last year’s sluggish consumption due to
SARS (Figure 1-24). The growth of money stock
has fallen steeply since April, when the government ordered financial institutions to curb lending. Growth now stands at 13.6% as of August
2004. Meanwhile, food prices have been rising
as agricultural production stagnated due to bad
weather and the reduction in area under cultivation. Thus, consumer prices in August rose 5.3%
for a second consecutive month. Raw material
prices also attest to this inflationary trend, recording double-digit increases on the previous
year due to the rise in steel and other industrial
material prices, as well as to surging crude oil
prices on the world market (Figure 1-25).
As regards external trade, imports exceededexports in January-March as the government
adopted the policy of curtailing exports andpromoting imports to avoid trade friction. However, the trade surplus returned in April-June,largely due to the increase in electrical machinery exports (Figure 1-26).
6.

China (2): Oil Consumption and Importson the Rise (see p. 30 for Figures)

China’s demand for energy has come to affectthe world economy, and some argue that energy
constraints may hinder China’s economic growthin future. This section analyzes the current energy situation of China, with specific focus onoil.
Oil consumption in China is increasing eachyear, accounting for an ever-larger global share.
Compared with Japan’s, that of China rose fromless than half in 1990 to over 100% in 2002,
reaching 110% in 2003. Accordingly, China’s
share of world oil consumption more than doubled from 3.4% in 1990 to 7.7% in 2003 (Figure1-27).
China became a net importer of oil (crude
oil and oil products) in 1993. As consumption
increased, China’s share of world oil importsrose gradually, reaching 5.7% in 2003. The Chinese government is seeking to diversify its
sources of oil supply, which now include theMiddle East, Asia, Africa and the former Soviet

Development Bank of Japan Research Report/ No. 48

3Union (Figure 1-28).
Oil represented only 23.4% of total energy
consumption in China in 2002, with coal accounting for almost two thirds (66.1%). Somepoint out the low efficiency of power generation,
which mostly relies on thermal plants using coal.
The rate of energy consumption still far exceedsthat of the U.S. and Japan, although it has declined constantly since 1990 (Figure 1-29).
In terms of per capita energy consumption,
the U.S. and Japan exceed China by a factor ofover eight and four respectively. Taking accountof its population and growth potential, China’s

4

Development Bank of Japan Research Report/ No. 48

energy and oil consumption is expected to rise
substantially in future years (Figure 1-30). In
order to meet the increase in energy demand, theChinese government is actively diversifying energy sources through such measures as the construction of natural gas pipelines, the establishment of oil reserves, the development of overseas
resources (Figure 1-31) in addition to the improvement of energy efficiency. However, further policy responses including environmental
measures will be needed to cope with the future
increase in energy demand that will accompany
economic growth.

II Japanese Economy: Steady Recovery Continues
1. Overview: World Economy Holds the Key
to Sustained Recovery (see p. 31 for Figures)
The Japanese economy continues to recover as
improvements in the corporate sector begin tospill over to the household sector, such as
through better employment conditions. Although
the future of the Japanese economy may largely
depend on the impact of soaring crude oil prices
on the domestic and external economies andtrends in the world economy, the steady recovery
will continue for some time as the brighter corporate sector is expected to benefit the household
sector.
Since starting to rise in April-June 2002,
real GDP (Figure 2-1) has recorded eight consecutive quarters of year-on-year growth toApril-June 2004, except January-March 2003,
when the growth fell to zero largely due toslowdowns in overseas economies. Looking
more closely at the annual growth rates during
this period, real GDP growth fell in the second
half of FY2002 to almost 0%, as growth in overseas economies slowed due to the Iraq war and
SARS. In FY2003, however, exports and business investment picked up as these negative factors faded and the world economy turned up.
Consequently, real GDP growth improved andstayed around 6-7% throughout the second halfof FY2003. Although the growth slowed in
April-June 2004, strong recovery continues, led
by exports and business investment. Private
consumption is also picking up gently.
Looking at the trend of each GDP (grossexpenditure) component, consumption is increasing somewhat due to rising consumer confidence reflecting the better employment situation. Real private consumption recorded twoconsecutive quarters of decline in the second halfof FY2002 because consumer confidence weakened due to growing uncertainties about the future of the economy and the fall in share prices.
Since the beginning of FY2003, however, consumption has increased for five quarters in a row,
as rising incomes have boosted confidence.
Looking ahead, continued improvements in thecorporate sector are expected to have a greater

impact on the household sector through income
and employment. Consumption is therefore expected to follow a gentle uptrend.
Business investment is rising in both the
manufacturing and non-manufacturing sectors.
Real private non-residential investment has increased for eight straight quarters since
July-September 2002 due to the recovery in production
andcorporate
profits,
exceptJuly-September 2003, when the growth fell below 0% in reaction to the extraordinary increase
recorded in the previous quarter. The trend byindustry indicates a broad recovery of investment,with faster growth in the non-manufacturing aswell as manufacturing sectors, particularly indigital home electric appliances.
Residential investment remains almost flat.
Real private residential investment declined from
FY2001 but has stayed almost flat since early
FY2003, as construction starts continued to accelerate for owner-occupied houses in expectation of higher interest rates, even after the surge
in demand to benefit from the housing loan tax
break in July-September 2003.
Public investment has been falling, reflecting the financial difficulties faced by both central
and local governments. Real public investment
has declined for nine consecutive quarters sinceApril-June 2002 and accounted for less than 5%of GDP (nominal basis) in 2004. Further declines
are expected as structural reforms and financial
difficulties continue.
The rise in exports is now slowing. As theworld economy has picked up, real exports haveposted a double-digit quarter-on-quarter increase
for four straight periods since July-September
2003, when the impact of the Iraq war and SARS
subsided. However, the growth of exports to
Asia has been slowing recently.
Imports are rising gently. Real imports haveincreased for four quarters in a row since
July-September 2003 due to the gradual recoveryof the domestic economy.
To confirm from the supply side the trend of
GDP described above, we now look at recent
trends of key components for the 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 theDevelopment Bank of Japan Research Report/ No. 48

5construction activity index (1995 as base year,
8.1% weighting in 1995) (Figure 2-2, seasonallyadjusted).
Although the industrial production index
declined slightly in early 2003 as overseas
economies stagnated due to rising tensions in
Iraq and the SARS epidemic, it has risen for four
quarters in a row since July-September 2003 as
the world economy has recovered, led by the U.S.
and East Asia, with a major contribution fromthe electronic device and transport equipment
industries. However, the growth of production is
now slowing as exports are no longer rising as
fast and as inventories of electronic devices pile
up. The Manufacturing Production Forecast
Survey projects a monthly increase of 1.3% for
September 2004. If such growth materializes, theaverage industrial production index for
July-September 2004 will be flat from the previous quarter. Furthermore, the production index
forecast is less likely to be achieved now, particularly for electronic devices, which may also
be interpreted as a sign of slower production
growth.
The tertiary industry activity index bottomed out in April-June 2002, rising for the firsttime in five quarters, then rose slightly. Looking
ahead, it will be important to monitor the extent
to which the recovery in the corporate sector assists the consumption sector including services
and wholesale/retail/restaurants.
The construction activity index has declined
since early FY2003, after holding steadythroughout FY2002. Related statistics suggestthat this is due to further reductions in public
works, although private construction activity isbottoming out.
The inventory cycle (Figure 2-3), an important leading business indicator, triggered concern
about a possible inventory adjustment in early
2003 as shipments leveled off largely due to a
slowdowninoverseas
economies.
In
July-September 2003, however, shipments rose
again as the world economy recovered, and theinventory cycle has since stayed in the buildup
phase, with actual inventories still showing
year-on-year decreases. One major concern isthat the inventory cycle for electronic devices,which drove the increase in production, crossed
the border between the buildup phase and the6

Development Bank of Japan Research Report/ No. 48

unintended accumulation phase (45-degree line)
in April-June 2004, thus necessitating an inventory adjustment. Although the inventory adjustment in electronic devices has not seriously affected manufacturing production overall, any
protraction of this inventory adjustment might
affect the overall level of production. The sustainability of the current economic recovery will
depend on whether the shipments of electronic
devices, backed by the expansion of the world
economy, will bounce back and support the current growth in exports and production.
2.

Employment Situation Improves as Job
Offers Increase (see p. 32 for Figures)

The ratio of active job openings to applicants has
been rising since the bottom of 0.51 in January-March 2002 (Figure 2-4). This is because thenumerator (i.e. the number of job offers) continues to increase while the denominator (i.e. thenumber of job seekers) declines.
The unemployment rate was high from thelatter half of 2001 but has declined somewhat
since July-September 2003, with monthly fluctuations. The improvement in employment situation benefits all age groups without exception(Figure 2-5). Thus, unemployment, although still
high, shows clear signs of improvement.
The number of workers increased from a
low in April-June 2002, but the improvement
slowed after recording a year-on-year increase in
April-June 2003, and then leveled off (Figure 2-6(1)). By industrial sector,3 the number of workers
has been decreasing in manufacturing and construction, and the increase is led by the service
sector, particularly in industries related to medical care and welfare. Thus, the share of the service sector is increasing gradually in total number of workers.4
By type of employment, temporary anddaily employees5 have been increasing, while the3

Based on the new industrial classification (revised in
March 2002).
4
See Chapter III for labor movement between industries
and the outlook of employment by industry in light of futurechanges in industrial structure.
5
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.

number of regular employees has risen over theprevious year after a prolonged decline (Figure
2-6 (2)). On the other hand, the number ofself-employed and family workers shows along-term downtrend.
By size of corporation, the number of employees in large corporations (employing 500 or
more workers), which declined substantiallyfrom the second half of 2001, rose in 2003 andboosted the total number of employees (Figure
2-6 (3)). The recovery is spreading to medium-sized corporations, employing 30-499
workers. Meanwhile, small-sized corporations,employing less than 30 workers, are still shedding employees, and on balance the number of
employees is rising only slowly.
Overtime hours have been increasing steadily after reaching a low in October-December
2001, thanks to the recovery in corporate production (Figure 2-7). The increase is most significant in the manufacturing sector, where overtime hours surpassed the values reached during
the recent two peaks.6 This rise in overtime hours
suggests a further recovery in employment, but
has not translated into a significant increase in
the number of employees7, so the employment
recovery will remain slow.
3. Income Holds Steady, Retail Sales Bottoming Out as Consumer Confidence Improves(see pp. 33-34 for Figures)
The year-on-year change in total cash earnings
per person reveals continued sub-par performance (Figure 2-8). Specifically, overtime pay
continues to rise on the previous year with theincrease in overtime hours (Figure 2-7), but
regular wages and salaries as well as bonus andspecial earnings show no improvement, partly
due to the downward pressure from the rising
share of part-time workers in the workforce.8
6

April-June 1997 and October-December 2000 (provisional) on a quarterly basis. The amount of overtime hours
also peaked in those periods.
7
For detailed information on overtime hours and the number of employees in the manufacturing sector, see DBJ,
“Manufacturing: Production Growth Has Led to Increase in
Business Investment and Overtime Hours, But Not to Increased Employment,” Monthly Economic Notes,
July/August 2004.
8
Part-time workers receive just over 20% of the wages

Nominal compensation of employees,9 which
is useful for understanding the income situationin terms of the whole economy, is bottoming out
after falling since 2001 (Figure 2-9), mainly because the number of employees has almost hit
the bottom although per capita wages do not appear to be improving (Figure 2-6 (3)). Thus, theincome situation overall remains flat, so thenegative impact of reduced income on consumption has been waning recently.
Against this backdrop, real private final
consumption according to the GDP estimate has
shown little quarter-on-quarter movement (Figure 2-10). 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 ofhouseholds as well as the inclusion of imputed
rent. Nonetheless, the nominal consumption expenditure of all households in the Family Income
and Expenditure Survey has been recovering recently as consumer confidence has improved, as
will be mentioned later (Figure 2-11).10 By typeof item, the increase is led by expenditures related to car purchases and reading/recreation.
Likewise, on the supply side, the retail sales
index has recently recovered somewhat, backed
by the increased sales of seasonal products thissummer due to the heat wave (Figure 2-12). For
home appliances in particular, the sales of
air-conditioners led the overall increase, supported by strong sales of flat-panel TV sets andDVD players in recent years, and especially for
the Olympic Games.11 Passenger car sales also

earned by full-time workers, in part due to the difference inhours worked. Therefore, any increase in the share ofpart-time workers in the workforce exerts downward pressure on wages per person.
9Compensation of employees refers to that part of value
added which is distributed to employees for the provision oflabor. This includes not only cash payments to employees
but also social insurance contributions by employers andallowances in kind such as meals and commuter passes. Asa rule of thumb, compensation of employees is approximately (per capita wages)×(number of employees).
10
Some attribute the extraordinary year-on-year increase
recorded in January-June 2004 to possible overestimation
caused by the replacement of households covered by thesurvey.
11
Data according to the Nippon Electric Big-Stores Association (NEBA).
Development Bank of Japan Research Report/ No. 48

7rose, particularly small car sales with the introduction of new models, after a long decline due
to a cyclical drop in demand. Sales of standard-sized cars and light vehicles also remainstrong.
Against this backdrop, the medium-term
trend of retail sales by type of operation ischanging (Figure 2-13). Since the 1990s, sales ofdepartment stores have shrunk while those of
supermarkets have risen constantly, and overtook
department stores in the mid-1990s. Relatively
new types of operation such as convenience
stores, DIY stores and direct marketing have also
seen their markets expand as total retail sales
stagnate,12 pointing to structural changes in theretail industry.
Finally, individual indicators confirm therecovery of consumer confidence. The Consumer
Confidence Index for the coming six months13(Figure 2-14 (1)) shows improvements in all
items of consumer perception, particularly in“employment” and “overall livelihood,” reflecting expectations for economic recovery. The
Living Insecurity Index (Figure 2-14 (2)) is recovering, though with some fluctuation. The
Nikkei Consumption Forecast Index is also
starting to pick up after experiencing anabasis
and slump. Thus, consumer confidence indicators have strengthened, propping up the recent
recovery in consumption.
4. Business Investment Increases in Manufacturing and Non-Manufacturing(see p. 35 for Figures)
Business investment is increasing in both the
manufacturing and non-manufacturing sectors.
Real private business investment has increasedon the previous year for seven straight quarters
since July-September 2002 on the back of therecovery in exports and production, except
12

The data on DIY stores, direct marketing and electric
appliance stores do not necessarily reflect the sales trend of
the whole operation, as their coverage is limited to themembers of relevant industry groups (associations).
13
In April 2004, the Cabinet Office consolidated the former
Consumer Confidence Survey, Monthly Consumer Confidence Survey and One-person Households Consumer Confidence Survey into the new Consumer Confidence Survey.
Also, the item “perception of price” was excluded from thecalculation of the consumer confidence index.
8

Development Bank of Japan Research Report/ No. 48

July-September 2003, when the growth fell below zero in reaction to the extraordinary increase
recorded in the previous quarter. According to
the Statistical Survey of Incorporated Enterprises(Figure 2-15), business investment in the manufacturing sector has increased on the previous
year for five consecutive quarters sinceApril-June 2003, thanks to the rising return on
investment. Business investment in manufacturing is led by electrical machinery including electronic devices related to digital home electric
appliances. In manufacturing, the recovery has
been slower although return on investment isrising. Nonetheless, non-manufacturing investment has been increasing for three quarters running since October-December 2003, and the paceof increase is accelerating. Thus, the recovery inbusiness investment has spread, from the manufacturing sector to the non-manufacturing sector.
Figure 2-16 shows the movement of machinery orders (domestic private demand excluding ships and electric power), a good leading
indicator of business investment. Machinery orders in the manufacturing sector have increasedon the previous year for eight straight quarters
since October-December 2002, mainly fromgeneral machinery and electrical machinery for
digital home electric appliances. Since machinery orders generally lead business investment by
two to three quarters, this means that business
investment in the manufacturing sector will remain strong for some time to come. In the
non-manufacturing sector, on the other hand,machinery orders have fluctuated, depending onorders from the heavily weighted telecommunication industry. However, the trend of building
construction started (Figure 2-17), a leading indicator of building investment, indicates that
non-manufacturing business investment is increasing mainly for stores and offices, as well as
typical manufacturing business investment forplants. Thus, business investment in the
non-manufacturing sector is expected to grow, led
by building investment for stores and offices,
although the growth in machinery investment is
not as significant as in the manufacturing sector.
Figure 2-18 shows the diffusion index of
production capacity (“excessive capacity” minus“insufficient capacity”). In both the manufacturing and non-manufacturing sectors, the lead of

“excessive capacity” over “insufficient capacity”
has declined to almost zero, pointing to further
reduction in the perceived overcapacity. The capacity utilization index for the manufacturingsector is on the rise thanks to capacity reduction
through asset consolidation and production
growth on the back of increased final demand.
Thus, business investment is expected toremain strong for some time to come because:(1) machinery orders, the leading indicator, areon the rise particularly in manufacturing; (2)construction starts are increasing mainly forstores and plants; (3) the perception of overcapacity is improving; and (4) corporate profits forthe current business year are expected to increase
substantially.
5. Residential Investment Stays Flat(see p. 36 for Figures)
Housing starts (seasonally adjusted annual rate)
have stayed around the 1.2 million mark (Figure2-19).
The year-on-year change by component(Figure 2-20) indicates that housing starts arealmost flat for all components: owner-occupied
houses, housing for rent and housing for sale.
Some positive factors, such as partial improvement in the income and employment situation
and accelerated construction starts in anticipationof higher interest rates, are not strong enough toprop up residential investment overall, which has
not shown significant movement recently.
The diffusion index of orders received forsingle-dwelling custom-built houses (Figure2-21) is often regarded as a good leading indicator of construction starts for owner-occupied
houses. According to the index, the construction
starts will continue to improve in July-September
2004 but the improvement will slow in October-December. This is because demand for
housing construction will rise in July-September
before removal of the tax-break on mortgage
loans,14 followed by a reactionary decline in October-December. On average, construction starts
14
Next year, the maximum amount of outstanding loans
eligible for the tax break scheme will be reduced to ¥40
million (¥50 million in 2004). Accordingly, the maximum
deduction will fall to ¥3.6 million (¥5 million in 2004), andfurther reductions are planned for the years ahead.

for owner-occupied houses are expected to remain flat in the months ahead.
As can be deduced from the movement of
housing starts, real private housing investment(seasonally adjusted annual rate) has stayedaround ¥18 trillion since 2002 (Figure 2-22).
Looking at the condominium market15 in theTokyo metropolitan area, stocks which had accumulated by 2003 have been reduced to the
7,000 unit range, the lowest level since 2000
(Figure 2-23). Although this cutback would suggest that condominium starts will increase in themonths ahead, some argue that the decline actually reflects fewer units marketed due to thepostponement of sales.16 Therefore, the decreasein stock may not result in an increase in housing
starts for some time to come.
Figure 2-24 shows the ratio of new condominium prices to annual income (condominium
prices/annual income) in the Tokyo metropolitan
area. The ratio has steadily fallen since the bubble burst, thus propping up the condominium
market. Despite signs of bottoming out, the ratio
is still low and therefore is not expected to adversely affect the market.
6. Constant Decline in Public Investment due
to Financial Squeeze (see p. 37 for Figures)
Public investment (public fixed capital formation) has declined almost constantly since 1999,
due to cuts in expenditures forced by financial
difficulties (Figure 2-25). Consequently, public
investment now accounts for just 4.6% of GDP(seasonally adjusted nominal value).
The value of public works contracted, aleading indicator, fell 13.7% in FY2003, the fifth
straight year of decline (Figure 2-26). Public
works implemented by the central government
continue to decline due to spending cuts in linewith the budget reform policy of the Koizumi
Cabinet. Although the decline was less steep inApril-June, the most recent period for which data
15

For the purpose of this report, the term “condominium”
refers to a subdivided housing lot made of reinforced steel,ferro-concrete or steel frames.
16
The Real Estate Economic Institute calculates the units ofstock at the end of the current month as the units of stock at
the end of the previous month + the units marketed in thecurrent month – the units sold in the current month. Hence,
the units not marketed are not statistically counted as stock.
Development Bank of Japan Research Report/ No. 48

9are available, the downtrend is not expected toreverse in the near future.
The initial budget for FY2004 proposed reductions from the previous year of 3.3% in central government expenditures on public works
projects and 8.4% in investment expenses underlocal finance plans. The policy to reduce public
investment is not expected to change this year, as
no supplementary budget is planned to stimulate
the economy.17 In line with the Basic Policies for
Economic and Fiscal Management and Structural
Reform 2004 (Cabinet Decision on June 4), theMinistry of Finance, in its guidelines for budget
appropriation requests for FY2005 published on
July 30, already envisages a further 3% cut incentral government expenditure on public works
projects in the FY2005 budget.
Although public investment is declining,government final consumption has stabilized atover 17% of GDP, propped up by the increase inpension payments and medical costs in particular.
Tax revenues are not expected to rise muchin future in view of the shrinking population andcumulative deficit on corporate tax, despite thepositive impact of economic recovery.18 Since
the budget deficits caused primarily by shortfalls
in revenue have been largely financed by government bond issues and by borrowings in thespecial account for local allocation tax, outstanding government debts have ballooned. Indeed, the outstanding long-term debts of central
and local governments will exceed ¥700 trillion
for the first time, totaling ¥719 trillion at the endof FY2004 according to the initial budget (Figure2-27).
Looking at Japan’s public finance in termsof stock, outstanding general government debts(as a percentage of GDP) of Japan are far larger
than those of the U.S. and EU15. In terms offlow, the primary balance (budgetary balance
excluding bond issues, interest payments andbond redemptions) remains poor, but the OECDestimate projects a slight improvement starting in
2004 thanks to reduced public investment, recovery in tax revenues and the effect of pension
reforms (Figure 2-28). Although the government
17
18

Nihon Keizai Shimbun, July 29 and October 19, 2004.
See “FY2003 Policy Evaluation Report.”

10

Development Bank of Japan Research Report/ No. 48

aims to reverse the deficit of the primary balanceby the early 2010s, grave concerns remain including the huge amount of outstanding
long-term debts, uncertainties about future
long-term interest rates and particularly the rising
government bond redemption cost.
7. Exports Slow, Current Account Surplus
Reaching Peak (see p. 38 for Figures)
Trends in foreign exchange rates are shown in
Figure 2-29. Since 2002, the yen/dollar market
rate has declined about 20% from ¥130/$ to lessthan ¥110/$, but the real effective exchange rate
has hardly changed, due to the unilateral depreciation of the dollar against the euro and othermajor currencies and lower price inflation in Japan than in the U.S. It can also be attributed tothe decline in the share of the U.S. dollar in theJapanese merchandise trade. Indeed, the yen appreciation against the dollar has had little impact
on Japanese exports so far in the current economic recovery phase.
Japanese exports are increasing in line witheconomic expansion in the U.S. and Asia. Imports have also been rising gradually as the domestic economy recovers (Figure 2-30). One of
the structural factors behind the simultaneous
increase in exports and imports is the international division of labor within the Asian region.
Looking at a breakdown of exports bycountry (Figure 2-31), booming exports to thefast-growing China have led the overall growthin the current economic recovery phase sinceApril-June 2002. Exports to the U.S. continued
to decline throughout 2003 as local auto production facilities became operational and plants
producing office equipment for the U.S. weretransferred to other Asian countries. The decline
has almost halted so far in 2004, but total exports
show signs of leveling off as the growth in exports to Asia slows down.
Figure 2-32 shows the trend of trade balance.
The growth in trade surplus, which continued toaccelerate in line with increasing export volume,
has been slowing since April-June 2004 due toslower exports and the rapid rise in crude oil
prices. The rise in crude oil and other fuel prices
is estimated to reduce the trade surplus by some¥2 trillion per year. However, the impact is notcomparable to the previous two oil crises ascrude oil now accounts for a small share of imports.
In addition to the slower growth of the trade
surplus, the rebound in the number of overseas
travelers following the end of the Afghan and
Iraq wars and the SARS epidemic has mitigated
the service trade deficit. Thus, the expansion of
the current account surplus has halted at an annual level of ¥18-20 billion (Figure 2-33).
Along with the current account, the capital
account also stayed in the black from April-June
2003 to January-March 2004 due to heavy investing in stock markets by foreign investors. To
combat the disruption in the balance of payments,
foreign exchange reserves were increased
through powerful market intervention. Since
April-June 2004, however, there has been no
market intervention as foreign investment inJapanese stocks has paused. Consequently, thecapital account returned to deficit and the balance of payments normalized (Figure 2-34).

The export ratio and import penetration forindustrial products are both on the rise, according
to the Analysis of Industrial Production Activities published by the Ministry of Economy,
Trade and Industry (Figure 2-37). Since thoseratios show volume changes excluding the effectof price fluctuation, the Japanese economy isincreasingly dependent on both exports and imports also in terms of volume.
In order to identify chronological changes in
the impact of exports on the domestic economy,
we calculated the coefficient of correlation between the growth of exports and that of industrial
production (seasonally adjusted change on threemonths earlier) on a monthly basis. Figure 2-38
shows the monthly trend of the coefficient ofcorrelation calculated with data covering a
10-year period. The result indicates a strengthening of the correlation between exports andproduction in recent months. This implies thatthe domestic business cycle is increasingly dependent on exports, and hence on the economic
growth of trading partners.

8. Trade Dependency Edges up as Relationship Strengthens between Exports and Domestic Production (see p. 39 for Figures)

9.

This section looks at the long-term relationshipbetween external trade and the Japanese economy.
Exports and imports as a percentage of GDP(Figure 2-35) declined rapidly from over 14% in
the early 1980s to almost 9% in the early 1990s,
due to the yen appreciation following the Plaza
Accord in 1985 and the domestic demand-led
economic growth in the latter half of the 1980s.
Since the second half of the 1990s, however, theratio has risen to reach 13% in April-June 2004.
By destination of exports (Figure 2-36), exports to NIEs and ASEAN expanded substantially until the mid-1990s, followed by the rapid
rise in the share of China since 2000. Indeed,
China’s share of total exports to Asia increased
from 26.3% in 1985 to 46.4% in 2003. In contrast, the share of the U.S. in total Japanese exports has declined to almost half of the share of
Asia19 (from 37.1% in 1985 to 24.6% in 2003).

Corporate goods prices (domestic demand products20) have been rising on the previous year
since April-June 2004 mainly due to the rapid
rise in international commodity prices. By industry, the negative contribution of machinery has
been diminishing, while there has been a positive
contribution from energy (crude oil and oil/coal
products in particular), non-ferrous metals andiron/steel. The positive impact of chemicals is
also increasing (Figure 2-39).
Meanwhile, corporate service prices areshowing signs of improvement but are still falling by about 1% despite the positive contribution of transportation (overseas factor). The
negative contribution of information services andleasing/rental is now shrinking (Figure 2-40).
Import prices have recorded a year-on-yearincrease for eight straight quarters since October-December 2002 on a contractual currency
basis. By product, there has been a substantial

19
This does not necessarily mean a decline in the influenceof the U.S. on Japanese exports because a substantial part ofthe components exported to Asia including China may beassembled into finished products to be exported to the U.S.
20
Domestic demand products represent the weighted average of domestic products and imports.

Import Prices and Corporate Prices on
the Rise (see p. 40 for Figures)

Development Bank of Japan Research Report/ No. 48

11increase for oil, coal and natural gas due to surging crude oil prices. Metals and related products
are also supporting price inflation. Import prices
on a yen basis have risen on the previous year
since April-June 2004. As the over-appreciationof the yen is being corrected, the rise in importprices on a contractual basis is now reflected inyen-based prices (Figure 2-41).
Although corporate prices are rising, consumer prices are still tending to fall slightly(Figure 2-42). Corporate prices were closely
linked with consumer prices until the early 1990s,
particularly during the oil crises. However, thelinkage has substantially weakened since the late
1990s (Figure 2-42).
10. Weakened Linkage between Consumer
and Corporate Prices since Late 1990s(see p. 41 for Figures)Consumer prices, which cover goods and services, are essentially different from corporate
prices, which only comprise goods traded between companies. Just as in corporate price statistics (Figure 2-39 for goods and Figure 2-40 forservices), Figure 2-43 breaks down consumer
prices into goods and services, and shows theirrespective trends since the second half of the
1990s. Consumer goods prices continue to decline slightly, with the positive contribution offood (including rice) and oil products being morethan offset by the negative contribution of industrial products including food products, textiles
and personal computers. Despite the positive
contribution from eating out, consumer service
prices remain almost flat overall as prices stagnate for personal services including culture andrecreation.
Overall, corporate and consumer goods
prices are diverging. Although rising oil prices
positively affect corporate and consumer prices
alike, the positive impact of intermediate goods
such as iron and steel on corporate prices has notbeen passed on to final (consumer) goods prices.
As regards service prices, corporate prices
continue to decline on the previous year, andconsumer prices have remained almost flat except for the period when public services exerted
upward pressure mainly due to the increase in therate of copayment.21 Corporate prices have declined faster than consumer prices, which implies
that the productivity of business services, which
are exposed to intense competition, is rising
faster than that of personal services.
Figure 2-44 shows the timing correlation
between corporate and consumer prices. From
June 1970 to May 1980, the coefficient of correlation was highest at 0.74 when corporate prices
impacted on consumer prices a month later.
From June 1990 to August 2004, however, thetime lag extends to three months, with a correlation coefficient of 0.29.
Thus, corporate prices today have less impact on consumer prices with a longer time lag.
Figure 2-45 indicates that the coefficient of correlation between the growths of the two priceindices has declined, particularly since around1999.
11. Easy Money Policy Continues(see p. 42 for Figures)
As regards quantitative financial indicators, themonetary base remains large although its
year-on-year growth has been slowing as thequantitative monetary easing policy is still inplace with a direct guidance target set for thecurrent account balance. However, the moneystock has been recording only single-digit increases on the previous year, because the monetary base is absorbed by the persistently low
credit multiplier (Figure 2-46). Meanwhile, thevelocity of circulation of money is bottoming out(Figure 2-47).
Outstanding private bank loans continue todecline as a whole, as the year-on-year increasein personal loans is more than offset by the continued decline in corporate loans for both the
manufacturing and non-manufacturing sectors(Figure 2-49). Nevertheless, the drop in outstanding loans has been curbed to 3.1% overall.
The improvement is clearly observed in the level
after adjustment for extraordinary factors (suchas fluctuations caused by the mobilization oramortization of credit loans), which indicates
only a 1.2% decline in the amount of outstandingloans (Figure 2-48). The attitude of private banks
21

12

Development Bank of Japan Research Report/ No. 48

From April-June 2003 to January-March 2004.

toward lending has also softened. The diffusionindex of lending attitude not only reached +17
points for large-sized corporation, but also turned
positive for SMEs (Figure 2-50). Likewise, contracted interest rates on new bank loans are falling slightly (Figure 2-51).
As regards short-term interest rates, theovernight-unsecured call rate and yields on
three-month CDs (bid) have remained at low
levels of near 0% and 0.1% respectively since
March 2001, when the quantitative monetaryeasing policy was introduced. Yields on 10-year

government bonds – a good indicator of longterm interest rates – remained relatively stable
after the commitment to continue the quantitativeeasing policy was announced in October 2003,
setting clearer criteria for terminating the policy.
Although the yields rose temporarily to 1.88%
last summer, backed by rising expectations for
economic recovery, they have since plunged due
to concerns about the future of the Japanese andU.S. economies, as well as to the stabilization of
consumer prices, and are currently around 1.4%
(Figure 2-51).

Development Bank of Japan Research Report/ No. 48

13III Medium-term Outlook of theJapanese Industrial Structure

2. (Reference) International Comparison of
Change in Industrial Structure(see p. 44 for Figures)

1. Changing Industrial Structure(see p. 43 for Figures)This section compares Japan with other developed countries (U.S., France and Germany) regarding the changes in industrial structure withspecial focus on the weight of the manufacturing(or industrial23) sector.
As shown in Figures 3-5 and 3-6, the reduced weight of the manufacturing (or industrial)
sector in nominal GDP and employment reflects
the productivity gap with the non-manufacturing(or non-industrial) sector. This phenomenon iscommonly observed in developed countries. Also,
the rise in GDP deflator is generally slower in
the industrial sector (Figure 3-7). In each of thecountries, the disparity in deflator growth willlead to a decline in the share of the manufacturing (or industrial) sector in nominal GDP, if its
share in real GDP stays unchanged.

This section outlines the changes in Japaneseindustrial structure using statistical data on the
output of goods and services, the amount ofvalue added and the number of workers.
Since the 1990s, the growths of real output22(Figure 3-1) and real GDP (Figure 3-2) have declined in the manufacturing sector, while they
have accelerated in the tertiary sector, particularly in services. The manufacturing sector has
seen its nominal GDP decline since the 1990s(Figure 3-3). The share of manufacturing in real
GDP stayed almost flat, moving from 26.6% in
1980 to 26.3% in 2002, but decreased seven percentage points in nominal GDP, from 31.7% in
1980 to 24.6% in 2002. The difference is explained by the gap in deflator increase between
the manufacturing and non-manufacturing sectors. The share of manufacturing is higher in
output than in value added because the intermediate input of the sector to value added is greaterthan that of the non-manufacturing sector.
The number of workers (Figure 3-4) in the
manufacturing sector declined substantially inthe 1990s after staying flat in the 1980s. The decline has been offset by increased employment inservices. Indeed, the share of manufacturing in
total employment declined six percentage points
from 25.1% in 1980 to 19.0% in 2002, whereas
the share of services increased more than 10
points from 19.2% in 1980 to 32.7% in 2002.
Meanwhile, employment in agriculture and mining (included in “others”) has declined constantly.
As will be demonstrated in the following
sections, this divergence between the increase inreal GDP and the decline in nominal GDP and
the number of workers in the manufacturing sector was caused by the improvement of productivity and the accompanying decline in deflator in
the sector.

22

Gross amount of production before deducting intermediate input.
14

Development Bank of Japan Research Report/ No. 48

3. Structural Change in Consumer Demandand Intermediate Input Promotes Trend toward Service Economy (see p. 45 for Figures)
In terms of real output, the growth of the manufacturing sector has slowed since the 1990s,
while that of the tertiary sector has accelerated,particularly in services (Figure 3-1). This section
examines whether such change in industrial
structure was brought about by the change in final demand structure or in intermediate input
structure. For this purpose, using input-output
tables for different periods (1980-85, 1985-90,
1990-1995 and 1995-2002), we divided thechange in real output in each industry between agiven period and another period into two components: the part induced by the change in final
demand and the part induced by the change inintermediate input.
The result is shown in Figure 3-8.
Throughout the 1980s, the manufacturing sector
exceeded the service sector in real output growth,
led by final demand factors including consumption, private capital formation and exports. Thisis because final demand for services mostly came23
In order to ensure statistical compatibility, the industrial
sector includes electricity and gas, as well as manufacturingand mining.

from private household consumption, whereas
various factors affected final demand for manufacturing, such as private capital formation andexports, as well as private household consumption. Thus, the output of the manufacturing sector increased due to robust final demand and stable growth in the early 1980s and the bubble
economy in the late 1980s.
Since the 1990s, however, the manufacturing sector has slumped due to reduced private
capital formation and changing intermediate input structure, while service output has risen
faster than manufacturing output thanks to increased consumption and the change in intermediate input structure. In both the first half and thesecond half of the 1990s, the contribution of
consumption to the change in real output was
greater in services than in manufacturing, indicating that the primary object of consumption
has shifted from goods to services. It should also
be noted that the change in intermediate input
structure has had a negative impact on manufacturing and positive impact on services. With theprogress of globalization, raw materials and intermediate products that were previously supplied to domestic manufacturers have come to beexported directly to production sites overseas.
Also, the trend toward the service economy increased intermediate demand for services, particularly business services.
Thus, the shift in industrial structure fromthe manufacturing sector to the tertiary sector
including services became evident with thechange in intermediate input structure, as consumer demand has become focused on services
and economic globalization has progressed alongwith the trend toward the service economy sincethe 1990s.
4. Change in Intermediate Input Structure(see p. 46 for Figures)
Based on the SNA Input-Output Table publishedby the Cabinet Office, this section examines thechange in industrial structure in terms of thechanging intermediate input structure. Since
93SNA data are only available for 1995 onward,
a comparison is made between 1995 and 2002.
The input-output table used in this analysis isbased on constant prices.

Figure 3-9 shows the extent to which eachindustry has increased its share in total intermediate input in other industries. Here, the term“other industries” refers to all industries excluding the particular industry, and the share of theindustry in total intermediate input in other industries is calculated as (intermediate input fromthe industry to other industries/total intermediate
input in other industries). The data indicate thatthe shares of industries such as services, finance/insurance and electrical machinery in totalintermediate input in other industries have increased. Figure 3-10 breaks down the service
sector into sub-sectors according to the Indicesof the Tertiary Industry Activity published by the
Ministry of Economy, Trade and Industry. As
can be observed, the increase in the share of services in intermediate input is largely attributable
to the growth of so-called business services including goods rental & leasing, information services24 and automobile rental & leasing. This
movement reflects the progress of outsourcing,including the replacement of owned equipmentwith leased equipment and the subcontracting ofsoftware development. In contrast, the shares ofcivil engineering/architectural services and engineering have declined due to reduced building
and public investment. The share of personal
services25 is also on the decline.
Services and electrical machinery are major
growth industries in the non-manufacturing andmanufacturing sector respectively, in terms ofintermediate input to other industries. The shareof services in intermediate input is rising in awide range of manufacturing and non-manufacturing industries (Figure 3-11). This implies that
services are increasingly being outsourced inmany industries. Meanwhile, the share of electrical machinery in intermediate input is increasing in the electrical machinery itself as well as inother mainly IT-related industries including precision instruments, transport equipment andnon-metallic minerals (Figure 3-12). Apparently,
this shift reflects the progressive introduction of
24
Although information services are not included in theservice sector according to the industrial classification in the
Indices of Tertiary Industry Activity, they are treated here aspart of the service sector in line with other statistics.
25
Mobile phones and other communication services, whichgrew substantially in the 1990s, are included in the telecommunication industry, and not in personal services.

Development Bank of Japan Research Report/ No. 48

15electronic components in many of the manufacturing industries.
5. Consumption Structure Also Points to
Trend toward Service Economy(see p. 47 for Figures)This section deals with the changes in consumption structure since the 1980s, with special focus
on the so-called “trend of consumption toward
the service economy.”
Figure 3-13 shows the share of spending onservices in real final consumption expenditure ofhouseholds on an SNA basis. The share ofspending on services rose four percentage points
from 49.5% in 1980 to 53.4% in 2002, whichmight suggest that the trend of consumption toward the service economy has been rather mild
so far.26 However, looking at actual value insteadof share gives a very different picture. Real consumption expenditure of households amounts toalmost ¥300 trillion (at 1995 prices) as of 2003.
Thus, a four-point change means an increase of¥12 trillion in actual value, which equals the real
GDP of the food industry in 2002 (¥11.7 trillion).
Since the impact of consumer spending on industrial structure is measured in terms of actual
value, we must consider not only the change incomposition but also the change in actual value
in order to understand the real trend of consumption toward the service economy.
This growth of the service economy is considered to stimulate production mainly in the
non-manufacturing sector. In order to identify
the importance of each industry in household
consumption, Figure 3-14 shows the change infinal consumption expenditure of households byindustry from 1995 to 2000, based on the SNA
Input-Output Table.27 The data indicate that real
final consumption expenditure of households
increased ¥20.7 trillion in total from 1995 to2000, of which only ¥2.2 trillion was spent on
26

The data represent the composition of consumption expenditure in real terms. The increase was more significant innominal terms, up from 44.2% in 1980 to 56.4% in 2002.
Since goods prices declined faster than service prices
throughout this period, spending on goods necessarily becomes more important in real terms.
27
Here, the time coverage is reduced to five years from1995 to 2000 because 93SNA data are only available for1995 onward in the SNA Input-Output Table.
16

Development Bank of Japan Research Report/ No. 48

manufacturing, while ¥18.5 trillion was allocatedto the non-manufacturing sector. In other words,
some 90% of the increment of expenditure from1995 to 2000 went to the non-manufacturingsector.
Looking more closely at the non-manufacturing sector, real estate experienced the largest
increase in consumption, followed by communications, public services and personal services.28
This movement is consistent with the trend
shown in Figure 3-13. Thus, the rise in consumer
spending on services has increased the earningsof service-related industries and stimulated theirproduction.
To what extent does the increase in consumption expenditure stimulate production in
individual industries? An indicator called theinducement coefficient helps answer this question. The inducement coefficient indicates by
how much a unit change in a final demand item
(consumption, exports, etc.) induces productionin each sector. The larger the coefficient, thegreater the production induced by the increase in
final demand.
The inducement coefficient of final consumption expenditure of households is plotted in
Figure 3-15 by industry. The horizontal axis indicates the inducement coefficient as of 2002 andthe vertical axis indicates the change in the coefficient from 1995 to 2002. The greater the valueon the horizontal axis, the larger the increase inproduction induced by a unit increase in household consumption. The greater the value on thevertical axis, the larger the induced increment of
production.
On the horizontal axis, the greatest values
are recorded by industries such as real estate andpersonal services,29 followed by retail and food& beverages. The finding that the production of
those industries is sensitive to changes in household consumption is intuitive. On the verticalaxis, the rise in the inducement coefficient ismost significant by far in communications, followed by industries such as electrical machinery,
28
Public services include education, research, medical &health care, etc. Personal services include recreation,broadcasting, eating and drinking places, hotels, laundry/hairdressing/bathhouses, etc.
29
By definition, house rent, which is included in real estate,is only sensitive to household consumption, thus raising theinducement coefficient for the industry.

business services and public services. The rapid
rise in the inducement coefficient for communications is largely due to the increase in personalcommunication charges with the popularizationof mobile phones and the Internet. The findings
show that the inducement coefficient is generally
larger in the non-manufacturing sector. Chronologically, the coefficient has been rising in manyof the non-manufacturing industries. In contrast,
the coefficient is small in many manufacturingindustries and has been declining in most of them.
Thus, it may be concluded that any increase inhousehold consumption has a larger impact on
the production of the non-manufacturing sector.
The findings in this section may be summarized as follows. The trend of household consumption points to a gradual increase in the shareof spending on services, with substantial impact
on industrial structure in terms of actual value.
The rise in spending on services may also be
confirmed from the changing composition ofhousehold consumption by industry, as almost
90% of the recent increment of household consumption has been allocated to thenon-manufacturing (service) sector. Moreover,the increase in household consumption has more
impactontheproductionofthenon-manufacturing sector, which also experiences a rise in the induced increment of production. Overall, the trend of consumption toward
the service economy is expected to continue andwill increase production in the non-manufacturingsector.
6. Changing Consumption Structure due toAging (see p. 48 for Figures)
Aging, combined with the declining birth rate, isa key factor in projecting future consumption
structure. According to an estimate by the National Institute of Population and Social Security
Research (January 2002, medium variant projection), the ratio of older persons in the total population30 is expected to rise from 17.4% in 2000 toover 25% in 2014, which means that one in four
persons will be 65 or older. At the same time, the30

For the purpose of this section, the term “older persons”
refers to those aged 65 or over. Therefore, the ratio of older
persons represents the share of those aged 65 or over in the
total population.

ratio of children (0-14 years old) will decline
from 14.6% in 2000 to 12.0% in 2021. Due tothe difference in the composition of consumption
between age groups, which is examined below,
the changing demographic structure will haveconsiderable impact on the consumption structure of the whole economy. Using simple assumptions, this section seeks to identify the direction of future change in consumption structure,
which will accompany the expected change indemographic structure.
Based on the Family Income and Expenditure Survey of the Ministry of Internal Affairs
and Communications, Figure 3-16 shows theconsumption structure by age group of head ofhousehold.31 As can be seen, the households led
by older persons spend more on medical care andreading & recreation. Increased spending on
medical care may be attributed to the higher
morbidity rate for older persons and greaterawareness of health. As regards the large shareof reading & recreation, older persons have moreleisure time and can afford to spend more on
time-consuming recreational activities.32 On theother hand, older households spend very little on
education, largely because the cost of children’s
education in many households falls when thechildren leave home.
Thus, medical care and reading & recreationaccount for large shares in the expenditure ofolder households. If such consumption patternremains unchanged, spending on those items will
increase as aging progresses. Based on this assumption, the following segment projects the
expected change in consumption structure using
two approaches.
The first approach consists of forecasting
future changes in consumption structure using
examples of aged societies. This approach assumes that future changes in consumption structure can be partly predicted by focusing on geographical areas with higher-than-average ratiosof aged persons and comparing the consumption
31

Since the Family Income and Expenditure Survey is often
criticized for lack of statistical precision due to the small
number of samples, this report adopts average data for three
years from 2001 to 2003.
32
The Survey on Time Use and Leisure Activities of the
Ministry of Internal Affairs and Communications shows thatolder persons spend more time on leisure (tertiary) activities
as compared with the average for all age groups.
Development Bank of Japan Research Report/ No. 48

17structure in those areas with the national average.
Here, we compare the consumption structure in
the Chugoku and Shikoku districts with national
average. According to the Population Census
conducted by the Ministry of Internal Affairs andCommunications, 28.8% of the households in the
Chugoku and Shikoku districts are headed byolder persons as of 2000 (national average =23.8%). This ratio exceeds the forecast of thenational average for 2005 (27.3%) and is nearer
to the forecast for 2010 (30.7%).33 Thus, the current consumption structure in those districts isindicative of the national consumption structure
in 2010.34
Figure 3-17 compares the consumption
structure of all Japan with that of the Chugoku
and Shikoku districts. As compared with the national average, the consumption structure ofthese regions is marked by slightly smaller
spending on education and heavier spending on
medical care, which mirrors the future change in
consumption structure deduced from Figure 3-16.
However, the difference in composition is small
and could be considered insignificant.
Nonetheless, a small change in compositionindicates a substantial change in real value. In
this context, a second approach is necessary to
examine how the real value of consumption willchange for which items due to a mere change indemographic structure, if all other conditions
remain constant. The result of an estimate ofsuch change between 2000 and 2010 is shown in
Figure 3-18.
The estimation is made as follows. First,
according to the Family Income and Expenditure
Survey, the consumption expenditure for each
33

The forecast of the national average is based on the National Institute of Population and Social Security Research,“Household Projections for Japan (October 2003).”
34
With further geographical segmentalization, it is possible
to pick out areas with higher ratios of older persons. However, this report considers the Shikoku and Chugoku districts for the following reasons: (1) over-segmentalization
would affect the reliability of the data as the number ofsamples will be reduced; and (2) the data for the Shikoku
and Chugoku districts not only cover small cities but also
include large cities such as Hiroshima and Okayama, andare hence considered to be more representative of the national average in future. Also, the data are adopted from the
National Survey of Family Income and Expenditure (Ministry of Internal Affairs and Communications) rather thanfrom the Family Income and Expenditure Survey, which is
not necessarily reliable due to the small number of samples.
18

Development Bank of Japan Research Report/ No. 48

age group of the head of household in 2000 is
divided by the number of household members to
obtain the expenditure per person. Then, thisamount is multiplied by the estimated number ofhouseholds by age group and that of household
members published by the National Institute ofPopulation and Social Security Research to calculate the consumption for each age group in
2010. In this calculation, transfer expenditure toother households such as social expenses andallowance money – treated as current transfer forthe purpose of SNA – is excluded from total
consumption. Since the amount of consumption
expenditure thus obtained is based on the Family
Income and Expenditure Survey, it is finally adjusted to the level of final consumption expenditure of households on an SNA basis.
Items for which the largest increases are
expected are shown in Figure 3-18.35 Those include expenditure items related to culture/recreation and medical care such as package
tour expenses and health & medical care services,
as well as other service items such as houseworkservices and clothing-related services. Thus, future changes in demographic composition are
expected to consolidate the trend of consumption
toward the service economy.
The largest increase is expected for package
tour expenses, which will rise almost ¥400 billion by 2010. Market expansion for those services may be even faster because the expected
increase in income due to economic growth willraise per capita consumption.36 Thus, the shift inconsumption pattern will be substantial in termsof actual value.
7. Growth Factor by Industry as Observed in
Growth Accounting (1) (see p. 49 for Figures)
Real economic growth slumped throughout the
1990s both in the manufacturing and tertiary
sectors (Figure 3-19). In the manufacturing sector, the nominal growth rate turned negative inthe early 1990s as the GDP deflator declined.
The number of workers increased in the tertiary
sector, but declined in the manufacturing sector.
35

Decline in consumption is expected for education-related
items and general eating-out among others.
36
Estimates in Section 10 and seq. take into account thetrend of increase in consumption.

Figure 3-20 shows the trend of economic
growth by industry. Various industries contributed to economic growth in the 1980s, particularly non-manufacturing industries including
services and finance/insurance. Since 1991,
however, contributions have been concentrated
on specific industries such as services and electrical machinery. Above all, services have substantially boosted the increase in the number ofworkers. Although the electrical machinery industry has contributed significantly to economic
growth since the 1990s, its contribution has been
negative in terms of the number of workers.
8. Growth Factor by Industry as Observed in
Growth Accounting (2) (see p. 50 for Figures)
Based on growth accounting, this chapter breaks
down GDP growth into three factors37: labor,
capital and total factor productivity (TFP). The
labor factor is adjusted for working hours, andthe capital factor is adjusted for capacity utilization, including the non-manufacturing sector.38
TFP is calculated as the residual of economic
growth after subtracting the contribution of laborand capital.
Figure 3-21 identifies the factors of theeconomic slump since the 1990s based on thegrowth accounting thus conducted. In all industries, the slowdown in TFP has made the mostnegative contribution. By sector, manufacturing
has managed to maintain economic growth bycurtailing labor input to keep TFP at a reasonablelevel. In contrast, the tertiary sector, faced with asubstantial slowdown in TFP, has increased
capital and labor inputs to sustain growth.
Those characteristics are evident if wecompare typical growth industries in the manufacturing and tertiary sectors, namely electricalmachinery and services respectively. The growthof the electrical machinery industry has been
consistently led by TFP since the 1980s. Meanwhile, the growth of services has been led bycapital and labor inputs, with TFP staying almost
37

On the assumption of the Cobb-Douglas production function.
38
Adjustment for capacity utilization in the non-manufacturing sector uses the tertiary industry activity index (index
of all industry activity for agriculture and construction)
divided by capital stock, after removing the trend.

constant. Such input-led growth will be difficult
to maintain as the labor force is expected to decline. Rising TFP is a precondition for growth,particularly in the service sector.
Figure 3-22 indicates a negative correlation
between the rise in deflator and the rise in TFP
both in the 1980s and since the 1990s. Most of
the fastest increases in TFP belong to manufacturing industries. Thus, the relative price of
manufactured goods has declined as productivity
has risen, resulting in the reduction of the sector’s share in nominal GDP. The deflationary
trend in the 1990s is also implied by the movement of the deflator in each industry, as the risein deflator in relation to the same growth of TFP
declined throughout the 1990s.
9. Industrial Structure in 2020 (1)(Assumption of Potential Growth Rate)(see p. 51 for Figures)
Using the technique of growth accounting, thissection makes an assumption for the potential
macroeconomic growth rate, which is a basis for
projecting the industrial and employment structure in 2020.
According to the Population Projection forJapan (medium variant projection) (Figure 3-23),
the total population of Japan will decline to124.1 million by 2020, after peaking at 127.74
million in 2006. Likewise, the number of workers will decline to 62.89 million by 2020 fromthe peak of 67.71 million in 1997, partly due tothe decline in labor force participation rate,
which is expected to accompany population aging. The decline in the number of workers will
suppress the potential growth rate of the Japanese economy by reducing labor input on a
manpower basis.
Capital input, another determinant of potential growth rate, is expected to follow the trend of
business investment. Until 2020, the total savings
ratio (Figure 3-24) is expected to decline gently,
reflecting mixed movements including a decline
in the household sector due to aging, a gradualimprovement in the government sector and small
fluctuation in the corporate sector.39 Under these39

The savings ratio for each sector is estimated as follows.
• Household savings ratio: Using an estimated savings
Development Bank of Japan Research Report/ No. 48

19circumstances, the ratio of private business investment will contract slightly in parallel withthe total savings ratio.40 The growth of capital
input is expected to decline slowly from theratio function with the ratio of older persons (65 or over)in total population as explanatory variable, the householdsavings ratio is calculated by extrapolating values predicted by the National Institute of Population and Social
Security Research (medium variant projection) for the
projection period.

lower 2% range to the mid-1% range due to themild decline in the ratio of private business investment.41
If the trend of technological advance42 isextended on the assumption of those movements
in capital and labor, the potential growth rate of
the Japanese economy is expected to decline toan annual average of the mid-1% range for2004-2010 and then to 1% toward 2020.43
10. Industrial Structure in 2020 (2) (RealOutput Basis) (see p. 52 for Figures)(household savings ratio) =21.23 – 0.67 (ratio of older persons)(26.99) (-11.36)
2

R = 0.85, estimation period: 1980-2002 (calendar year
basis), t values in parentheses ( ).
• Government savings ratio: For the period from 2004 to
2008, the government savings ratio is back-calculated
from the savings-investment differential ratio in the
Background Paper prepared by the Cabinet Office (submitted to the Council on Economic and Fiscal Policy on
January 16, 2004), on the assumption that government
investment will be reduced by 3% each year. For 2009and onward, the ratio is back-calculated on the assumption that the savings-investment differential ratio willautomatically improve by 0.5% each year, and that government investment will continue to be reduced by 3%each year.
• Corporate savings ratio: The total savings ratio is divided
into the total savings (excluding dividends) ratio and thedividend ratio. It is assumed that the capital share will be
constant and that the total savings (excluding dividends)
ratio will remain unchanged from the actual figure for2002 (17.1%). The dividend ratio is calculated by extrapolating the expected dividend propensity that integrates its upward trend (assumed to rise from the actual
2002 figure of 14% to 36% in 2020) for the projection
period into an estimated dividend function with dividend
propensity (dividend payout/earnings) as explanatory
variable. The total savings ratio is calculated by subtracting the dividend ratio from the total savings (excluding dividends) ratio.
(dividend ratio) =–0.008 – 0.027 (dividend propensity)(–7.664) (–2.170)

2

R = 0.14, estimation period: 1980-2002 (calendar year
basis), t values in parentheses ( ).
40
The ratio of private business investment is calculated byextrapolating the predicted values of the total private savings ratio calculated in Footnote 1 for the projection period
into an estimated business investment ratio function withthe private total savings ratio as explanatory variable. It is
assumed that the ratio of borrowings for business investment will stay flat at the actual level of 2002 (8.7%).
(ratio of private business investment) =3.60 + 0.30 (private savings ratio) + 0.44 (ratio of borrowings(1.85) (4.44)(4.27) for business investment)2

R =0.69, estimation: 1980-2002 (calendar year basis), t
values in parentheses ( ).
20

Development Bank of Japan Research Report/ No. 48

Assuming (1) a decline in potential growth rate,(2) a change in consumption structure due to falling birth rate and aging, and (3) a change in intermediate input structure due to economic globalization and the trend toward the service economy, this section estimates the growth of real
output by industry, based on the input-output
table. The following method is adopted.
(1) Assumption of potential growth rate
Potential macroeconomic growth rate is estimated using the technique of growth accounting (assuming that potential growthrate equals real GDP growth rate).
(2) Assumption of final demand items
Real GDP is estimated for individual demand items: consumer demand andnon-consumer demand (consumer demandis further classified into service consumption and non-service consumption). Basically, consumer demand is estimated in thesame way as in Section 6 (Figure 3-18). The
only difference is that this section estimates
41

The growth of capital input is calculated by extrapolating
the predicted values of the business investment ratio for the
projection period into an estimated capital stock functionthat regresses the difference in capital stock with the business investment ratio.
Ln (difference in capital stock) =21.5 + 2.2 Ln (business investment ratio)(32.6) (6.1)
2

R =0.77, estimation period: 1991-2002 (calendar year
basis), t values in parentheses ( ).
42
The all-industry average of annual TFP growth for
1981-2002 (0.9%) is adopted as the trend of technologicaladvance.
43
Assuming the labor share of 0.71 and the capital share of
0.29, both representing annual averages for the 1991-2002
period.

future expenditure per household member
by taking account of the growth trend of percapita real final consumption expenditure ofhouseholds on an SNA basis (annual average for the period between 1981 and 2002:2.0%). The estimate is based on the mediumclassification of the Family Income and Expenditure Survey (some of the estimatedfigures cover individual items). Service
consumption covers those items that belong
to the service industry in SNA. For convenience, the difference between real GDP andconsumer demand is regarded as
non-consumer demand.
(3) Distribution of final demand items to individual industries
Real GDP, consumer demand (service andnon-service consumption) and non-consumer
demand thus estimated are distributed amongindustries (24 endogenous sectors in SNA).
Real GDP is distributed to each industry
according to its share in final demand in the
projection period, which is estimated fromthe composition of final demand by industry
for the period between 1995 and 2002, taking account of the trend of change in thecomposition. Service consumption is allocated entirely to the service sector.
Non-service consumption is distributed toeach industry based on its share in actual
consumer demand excluding services in
2002, which is assumed to remain constant.
(4) Estimation of intermediate input coefficient
tablesBased on the SNA Input-Output Table (covering 24 endogenous sectors in SNA) for
1995 (base year) and 2000 (comparativeyear), input coefficient tables are estimatedfor 2010 and 2020 using the RAS method.44
44

The RAS method aims at estimating the input coefficient
at a given time by statistically finding an adjustment multiplier for the coefficient from input-output tables for two
different periods in the past. The process begins with theresolution of the input coefficient vector into a change along
the rows (R) and a change along the columns (S). Then,assuming as given the input-output table for the base year aswell as the total of intermediate demand, intermediate input
and real production for the comparative year (input coefficient is not determined), a series of calculations is conducted so that the row totals and column totals of the preliminary amounts of inter-industry transactions estimatedfrom the input coefficient for the base year and total pro-(5) Calculation of real output
The estimated final demand vector for eachindustry is multiplied by the Leontief inverse of the input coefficient table that isfound with the RAS method to calculate theamounts of induced value added and real
output for each industry in 2010 and 2020.
Figure 3-26 presents the growth of real
output by industry to 2020 thus estimated.
For all industries, the average annual growth
will decline from 1.7% in 2002-2010 to
1.3% in 2010-2020 due to the slower growthof final demand. By industrial sector, thereal output of the manufacturing sector willgrow 1.4% in 2002-2010 and 1.3% in
2010-2020 per annum on average, while thatof the non-manufacturing sector will grow
1.8% and 1.4% respectively. Thus thegrowth of the non-manufacturing sector will
constantly outpace that of the manufacturingsector. By industry, the growth of manufacturing will be led by electrical machinery
due to the rising non-consumer demand(demand related to investment and export,
for example), while the growth of
non-manufacturing will be led by services
due to the rising consumer demand, as well
as by other tertiary industries such as transport and communications.
The share of manufacturing in total real
output will decline from 32% in 2000 to
30% in 2020, although increases are expected for some industries including electrical machinery. In contrast, the share of thetertiary sector including services will rise
duction in the comparative year may converge respectively
with the total of intermediate demand and the total of intermediate input in the comparative year. The vectors R and S
of the adjustment multiplier are found in this way.
From the change in the input coefficient vector between
1995 and 2000, this report finds the adjustment multipliervector consisting of the change along the rows (R) and thechange along the columns (S) and automatically extends it
to derive the intermediate input vector for 2010 and 2020.
Thus,
A2010 = R(10/5)×A×S(10/5), A2020 = R(20/5)×A×S(20/5)
where A2010 and A2020 represent the intermediate input vectors for 2010 and 2020 respectively, R and S represent theadjustment multiplier vectors along the rows and along thecolumns for the five-year period between 1995 and 2000,
and A represents the intermediate input vector for 2000.

Development Bank of Japan Research Report/ No. 48

21from 58% in 2000 to 65% in 2020, reflecting the shift of industrial structure toward
the service economy.
11. Industrial Structure in 2020 (3)(Employment Basis) (see p. 53 for Figures)This section estimates the change in employment
by industry from (1) the change in real output by
industry and (2) the trend of improvement in labor productivity. The process starts with the estimation of future real output per worker (laborproductivity) in the input-output table in light of
the trend of improvement in labor productivity.
Then, the real output thus estimated is divided bylabor productivity to obtain the number of workers in each industry to 2020.
Figure 3-27 (1) shows the expected change
in the number of workers from 2000 to 2020. In
the manufacturing sector, where greater improvement in labor productivity is expected, thenumber of workers will decrease across theboard (down 3.93 million), led by electrical machinery (down 1.17 million). In the labor-intensive non-manufacturing sector, however,a net increase of 1.96 million workers is expected, led by services (up 6.9 million), transportand communications (up 0.88 million) andwholesale and retail (up 0.74 million).
On the supply side, the number of employable persons, which takes account of the ratio of
those in side jobs, will decline to 66.03 million in2020 (down 3.72 million from 2002) due to aging and lower birth rate. This means that the expected number of workers on the demand side
(68.29 million) will exceed the number of employable persons by 2.26 million, indicating thata labor shortage will emerge (Figure 3-27 (2)).
Incidentally, the labor shortage will be reduced
from 2.26 million to only 50,000 based on thepotential labor force participation rate, which isestimated by taking into consideration the number of persons not in the labor force but wishing
to work (see Appendix 1 for details).
Effective countermeasures are needed, suchas improving productivity in services and otherjob-creating industries, raising the rate of participation in the labor force particularly among
women, and closing various gaps in labor supply
and demand.

22

Development Bank of Japan Research Report/ No. 48

Figure 3-27 (3) shows the expected change
in employment structure. The share of the tertiary sector including services will rise from 66%
in 2000 to 78% in 2020, reflecting the shift of
employment structure toward the service economy.
12. (Appendix 1) Expected Mobilization of
Potential Labor Force in the Young, Female
and Older Populations (see p. 54 for Figures)
Population aging raises concerns about theavailability of labor in Japan. The simulation
presented in the previous section indicates that alabor shortage will develop by 2020.45 The labor
force participation rate (labor force46/populationof 15 years old or more) has consistently declined since 1997 (Figure 3-28).
A comparison of the labor force participation rate by age group between 1980, 1990 and2003 indicates that the male labor participation
ratio has been almost 100% for age groups between the late 20s and the 50s. For women in
their late 20s, the labor participation rate rosefrom 49% in 1980 to 61% in 1990 and then to
73% in 2003. In contrast, the labor participation
rate has been consistently low in the younger andold age groups, for both men and women. The
rate for women in their 30s is lower than forother age groups by about 10%, resulting in an
M-shaped employment structure (Figures 3-29
and 3-30).
The potential labor force participation rate(by age group as of 2003) may be calculated bytaking into consideration those who are not in the45

The Population Projection for Japan (January 2002), published by the National Institute of Population and Social
Security Research, predicts in its medium variant projectionthat the population will begin to decline in 2007. Concerns
about labor shortages are heightened by the continued decline in the birth rate and the mass retirement ofbaby-boomers expected in the near future. An article in the
Nihon Keizai Shimbun on October 6, 2004 reported that the
Ministry of Health, Labour and Welfare would establish in
mid-October the Study Group on Employment Policy, an
expert group to address the decrease of 3.7 million workers
expected by 2015.
46
The Labour Force Survey of the Ministry of Internal Affairs and Communications defines labor force as the sum of
the employed (at work and not at work) and the unemployed
aged of 15 years old or more.

labor force but who wish to work.47 Although
there has been no significant change for men(Figure 3-29), the potential ratio exceeds the actual ratio by about 10% for women, particularlyin their 20s, 30s and 40s (Figure 3-30). Figure3-31 shows by age group the main reasons why
women wishing to work do not actually seek ajob. “Housekeeping and childcare” accounts forthe largest share among those in their late 20s
and early 40s. Although concerns about future
declines in labor force are focused on such issues
as the reduction and aging of population and themass retirement of baby-boomers, efforts should
be made to bring this latent labor force to themarket.48
13. (Appendix 2) Divergence on PreferredType of Employment between Employers andUnemployed Persons (see p. 55 for Figures)This section examines the current situation of thelabor market. Looking at the trend of employment by sex, the unemployment rate is rising in
all age groups for both men and women, particularly in the younger groups (Figure 3-32).49 As
regards the preferred type of employment, (1)both men and women prefer regular employment
in the younger groups, (2) most unemployed men
under 55 years of age prefer regular employment
and do not wish to take part-time work (Arbeit),and (3) unemployed women increasingly preferpart-time work after they have reached 35 yearsof age (Figure 3-33).
Figure 3-34 shows the number of employees
by type of employment. Regular employment has
been decreasing while other types of employ47
The difference between the unemployed and those not in
the labor force but wishing to work is that the latter conducted some sort of job-seeking activity in the survey period.
48
An increase in the number of NEET (not in employment,
education or training) people has been pointed out recently,
although they are not included in the potential labor force
for the purpose of this report. The term “NEET” generally
refers to those under 25 who do not wish to work eventhough they are neither students nor houseworkers (see forexample Kosugi and Hori (2003)).
49
The average unemployment rate in the 15-19 and 20-24
age groups rose substantially for both men and women:from 4.6% in 1980 to 5.6% in 1990 and to 12.3% in 2003
for men, and from 3.0% to 4.7% and to 9.4% for women.

ment have been increasing, particularly part-timework (Figure 3-34). The composition of employees by industry and by type of employment
as of 2003 shows that manufacturing, services50
and other non-manufacturing industries havelarge shares in male employment. Most of themale employees are regular staff, although theshare of part-time workers is larger in services.
On the other hand, services have the largest sharein female employment. It follows that many of
the female employees are part-time workers(Figure 3-35).
The discussion in this section may be summarized as follows. In the labor market, the shareof regular employees has been declining whilethat of part-time workers has been increasing. In
particular, the part-time employment ratio51 has
been rising gradually among female workers. By
industry, a large proportion of female workers
are employed in services or wholesale and retailas part-time workers. On the other hand, most of
the unemployed, particularly men and those in
the younger groups, strongly prefer regular employment, implying a mismatch between employers and the unemployed in terms of preferred
type of employment.
14. (Appendix 3) Increase in Part-time Employment in the Robust Service Sector, Labor
Movement Mostly Constrained within Industries (see p. 56 for Figures)
In the labor market, the net hiring (entering –leaving) rate52 has been negative since the late
1990s, as all industries other than services havemade negative contributions. By type of employment, the rate tends to be negative for gen-50

Services: eating and drinking places, accommodations,medical/health care and welfare, education, learning support,
compound services and other services.
51
Part-time employment ratio (by sex) = part-time andtemporary employees (according to Ministry of Internal
Affairs and Communications, “Labour Force Survey”) /total employees excluding executives (according to Ministryof Internal Affairs and Communications, “Labour Force
Survey”).
52
According to Ministry of Health, Labour and Welfare,“Survey on Employment Trends,”
net hiring rate = hiring rate – separation rate.
Thus, a positive net hiring rate indicates that hiring exceeds
separation.
Development Bank of Japan Research Report/ No. 48

23eral workers,53 particularly in manufacturing. As
regards part-time workers, however, the net hiring (entering – leaving) rate tends to be positivein services and wholesale/retail/eating & drinking places. Time-series data also indicates thatthe inflow of part-time and temporary workers
has been increasing in services and wholesale/retail (Figure 3-36).54
The composition of job changers in 1995,
2000 and 2002 indicates that many of them findnew employment in the same industry. By Industry, (1) former construction workers are now

53

In the Survey on Employment Trends of the Ministry of
Health, Labour and Welfare, general workers refer to regular workers minus “part-time workers.”
54
This does not necessarily reflect the current movement, as
2002 is the most recent year for which relevant data are
available in the Survey on Employment Trend.
24

Development Bank of Japan Research Report/ No. 48

less likely to find new employment in the industry but the share of those who find a job in another industry is still small, (2) former manufacturing workers have become more likely to findnew employment in services and wholesale &retail, as well as in the same industry, and (3)former employees in other non-manufacturingsector tend to find new employment in services.
Those findings imply that workers have progressively shifted to the labor-absorbing service sector (Figure 3-37).

I. World Economy: Expansion Continues
U.S. (1): Personal Consumption Slows, Business Investment Grows
Figure 1-1. Trends in Real GDP(annualized change on previous quarter, %)12
Personal consumption
Net exports
GDP growth rate

108Private residential investment
Government consumption and investment

Change in inventories
Private non residential investment

4.5

6

3.3

4
2
0
-2
-4

(CY quarterly basis)

-6
98

99

00

01

02

03

04

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

Figure 1-3. Change in Disposable Income byComponent

Figure 1-2. Personal Consumption Trends(annualized change on previous quarter, %)(1985=100)(annualized change on previous quarter, %)
15

150

20

IncomeTaxes
Growth of disposable income

140
10

130
120

5

15
10

110
100

0

5

90
80
Disposable income factor
Consumption propensity factor
Personal consumption
Consumer confidence index (right scale)

-5
-10
98

99

00

01

70
(CY quarterly basis)
03

-5

60
50

02

0

(CY quarterly basis)
-10
98

04

99

00

01

02

03

04

Source : U.S. Department of Commerce, “Personal Income andOutlays.”

Source : U.S. Department of Commerce, “Personal Income andOutlays.”Figure 1-4. Trends in Real Business Investment and Corporate Profits(annualized change on previous quarter, %)(annualized change on previous quarter, %)

25

40

20

30

15

20

10

10

5

0

0

-10

-5
-10

IT-related (hardware)
Buildings
Overall business investment

-15

-20

IT related (software)
OthersCorporate profits (right scale)(CY quarterly basis)

-30
-40

-20
98

99

00

01

02

03

04

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

Development Bank of Japan Research Report/ No. 48

25

U.S. (2): Recovery in Production and Employment, Weak Share Prices and Interest Rates
Figure 1-5. Industrial Production Index andCapacity Utilization in Manufacturing(1997=100)

125

Figure 1-6. Change in Number of Employees andUnemployment Rate(%)(change on previous quarter, 10,000 persons)

(%)

90

150

7
Mining/construction
Services, etc.

120

Manufacturing
Government

100

85

115

6

50
80

5

110

0
75

105

4

-50

100

70
98

99

00

01

02

Unemployment rate(right scale)

Changes in thenumber of employees

-100

3

03
04
(CY quarterly basis)

98

Manufacturing capacity utilization (right scale)Composite index
Total goods
Equipment

99

00

01

02

03
04
(CY quarterly basis)

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

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

Figure 1-8. Prices

Figure 1-7. Current Account Balance
2,000

(%)
2

0

0

Net transfer-2,000-2

Balance on income-4,000-4(annualized rate, $100 million)(change on previous year, %)5
4
32

Balance on services

1

Balance on good

-6,000-6-8,0000

Current accountbalance/GDP(right scale)-8-1

Producer prices (composite)
Consumer prices (composite)
Producer prices (core)Consumer prices (core)-2

97 98 99 00 01 02 03 Ⅰ Ⅱ Ⅲ(Annual basis) 04 (CY, quarterly basis)-398

Note :
Annual data to 2003. Annualized quarterly data since 2004.
Sources : U.S. Department of Commerce, “Balance of Payment” and “USInternational Trade in Goods and Services.”

99

00

3,000

(%)
6
10-yeargovernment bonds

5

10,0002,500
4Dow Jones

9,000

2,000
Nasdaq Composite
Index (right scale)

8,000
7,000
4

7

10 1/044

3
FF target rate

2

1,500
1

1,000
10 1/03

7

0
1/02

4

7

10

1/03

4

7

(day basis)
Sources :Dow Jones; DRI database.

26

04“Consumer Price Index.”(points)

($)

7

03

Figure 1-10. Long- and Short-term Interest Rates

11,000402

Sources : U.S. Department of Labor, “Producer Price Index” andFigure 1-9. Stock Market Indexes

1/02

01

(CY quarterly basis)

Development Bank of Japan Research Report/ No. 48

Sources : FRB data; Wall Street Journal.

10

1/04

4

7
(day basis)

European Economies: Recovery Underway
Figure 1-11. Real GDP of EU25
(quarter-on-quarter change by component)

Figure 1-12. Real GDP of Major European Countries(annualized change from previous quarter by component(annualized change on
previous quarter, %)(annualized change on previous quarter, %)10(1) Germany(1995 as base year)10
8

1.2 1.8

5
1.9

0
6
-5
-10

4

98
2.3

2

99

00

(annualized change on
previous quarter, %)0102(2) France

03

04(1995 as base year)

10

0

3.2
2.1

5

-2

2.8
0

-4
(CY quarterly basis)

-5

-6

98
98

99

00

01

02

03

04

Private consumption

Government consumption

Inventories
Exports

Fixed capital formation
Imports (reverse sign)

99

00(annualized change on
previous quarter, %)0102(3) U.K.

03

04(2001 as base year)

10

4.2
2.7

5

GDP

3.6

0

Source : Eurostat-5(CY quarterly basis)-10
Private consumption
Government consumption
Inventories
Fixed capital formation
Exports
Imports (reverse sign)GDP
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 1-14. Trend of Unemployment Rates

Figure 1-13. Trends in Foreign
Exchange Rates
1.30

(%)

(Q1/99 = 100)
120

(Euro/dollar)

1210Germany
France
U.K.

8
6

1.20
↑
Euro appreciation

110

4
99

1.10
100
1.00

↓
Euro depreciation

00

01

02

03

04
(monthly basis)

Figure 1-15. Consumer Prices and Monetary
Policy in Euro Zone

(%)
90

6

0.90
Euro/dollar

4Nominal effective exchange rate (right scale)

0.80
1/1/02
Notes:

1/1/03

1/1/0480

2(daily basis)0

1. Values in Figures 1-14 and 1-15 are seasonally adjusted.
2. Unemployment is based on ILO standard for international
comparison.
Sources : European Central Bank; Eurostat; OECD.

99

00

01

02

03

04
(monthly basis)

Consumer price index (euro zone)
Consumer price index (core, euro zone)
ECB intervention rate

Development Bank of Japan Research Report/ No. 48

27

Economies of Major Asian Countries: Rapid Growth Led by Exports,
Slumping Consumption in Korea
Figure 1-16. Real GDP Growth Rate
Singapore (right scale)Taiwan

Korea

(%)

15

(%)

20

12.5
10

5.5

15

7.7

10

5

5
0

0

-5
-5
-10
(CY quarterly basis)(CY quarterly basis)(CY quarterly basis)

-15

-10
99

00

01

02

03

04

99

00

01

Fixed capital formation
Net exports
GDP

02

03

99

00

Private consumption
Errors01

02

03

Government consumption
Change in inventories

2.2

Figure 1-17. Manufacturing
Sector Production Index
30
25
20
15
10
5
0
-5
-10
-15
-20

04

04
(％)

Figure 1-18. Real Wage Increase

(%)

(%)

(%)

15

(right scale for Taiwan and Singapore)

10

10
5

5

0
-5

0

-10
(CY quarterly basis)
99

00

01

02

03

(CY quarterly basis)

-15

-5
99

04

Korea

TaiwanFigure 1-19. Price Inflation

00

01

02

03

04

Singapore

Figure 1-20. Interest Rates (Three months)

(%)

(%)

6

8

4

6

2

4

0

2

(CY quarterly basis)

-2
99

00

01

02

03

04

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

28

Development Bank of Japan Research Report/ No. 48

0
Ⅰ Ⅲ Ⅰ Ⅲ Ⅰ Ⅲ Ⅰ Ⅲ
00
01
02
03

1
04

3

5

7

9

China (1): Mild Slowdown in Investment
Figure 1-22. Composition of Investment
Completed (1)Figure 1-21. Real GDP Growth(trillion yuan)

(%)
12

(%)

6

50

5

40

9.6

10
8
6

4

4

3

2

30

26.7

31.0
20

2

0

10

1

-2
-4

0
Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ
02
03
04

98 99 00 01 02 03

Fixed capital formation
Government consumption
Net exports

Private consumption
Change in inventories
Growth rate

Total

Figure 1-23. Composition of Investment
Completed (2)<Industries with largest contribution>Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ
02
03
04
Change on previous year (right scale)Figure 1-24. Retail Sales of Consumer Goods(%)(trillion yuan)
5(Apr.-Jun. 2004)

Change on previous year0
99 00 01 02 03

Share Contribution

1) Real estate

22.1%

24.6%

22.8%

2) Electricity/gas/water

46.9%

9.3%

15.2%

3) Transport

19.2%

11.5%

9.5%

15

4
10

3
2

5

<By region>
January-March
Change onprevious year

April-June

1

Change on
Share previous year

Share

64.2%

54.6%

Eastern provinces

47.8%

20.1%

Central and western provinces

45.4%

35.8%

22.8%

45.4%

Total

47.8%

100.0%

24.3%

100.0%

00
98 99 00 01 02 03

AmountFigure 1-25. Prices and Money Stock
14
12
10
8
6
4
2
0
-2
-4
-6

Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ
02
03
04
Change on previous year (right scale)Figure 1-26. Exports and Imports(change on previous year, %)(%)(million dollars)
22

50

20

40

(%)

60
50
40

18

30

30

16

20

20

14

10

12

0

10

1
02

3

5

7

9

11 1
03

3

5

7

9

11 1
04

Consumer price index
Raw material price index
Money stock (right scale)

3

5

7

0
-10
Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ
02
03
04
Exports
Imports
Export growth (right scale)
Import growth (right scale)

98 99 00 01 02 03

Note :The growth rate represents change on the previous year.
Sources : IMF, “International Finacial Statistics,” China Statistical Yearbook, China Monthly Economic Inicators and People's Bank of China data.

Development Bank of Japan Research Report/ No. 48

29

China (2): Oil Consumption and Imports on the Rise
Figure 1-27. Oil Consumption and Share in
Global Consumption(%)

Figure 1-28. Oil Imports of China(world share and by imports origin)(million barrels/day)9(million barrels/day)
10

(%)

30

6

5.7
7.7

8

25

5

20

4

15

3

10

2

5

1

8
7
7.0
6

6

5
4
4
3

2

0

0

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

Oil consumption in China (right scale)
Oil consumption in Japan (right scale)
Share of China
Share of Japan

Note : Data include crude oil and oil products.
Source : BP

97

98

99

00

01

03 (CY)

02

Middle East

Asia

AfricaEx-USSR

OthersShare of China (right scale)Note : Data include crude oil and oil products.
Source : BP

Figure 1-29. Trend of Energy Intensity

Figure 1-30. Per Capita GDP in PPP and
Energy Consumption per Capita(1975, 2002)(tons of oil equivalent/GDP in thousand US dollars)

9
China
U.S.
Japan

2.0

1.5

1.0

0.5

0.0
90

91

92

93

94

95

96

97

98

99

00

01

02
(CY)
Note :
Energy intensity = Total primary energy supply (tons of oil
equivalent)/GDP in dollars (1995 prices in thousand
US dollars).
Sources : IEA; World Bank.

Total primary energy supply per capita(tons of oil equivalent)

2.5

1975

8

2002

U.S.

7
6
5

Japan

2002

4
1975

3
2

China

1
1975

0
0

2002
10

20

30

Per capita GDP in purchasing power parity(thousand dollars)
Sources : IEA; World Bank.

Figure 1-31. Chinese Government Policy Measures on Energy
West-east gas pipeline
project

A natural gas pipeline construction project. Construction started in July 2002 and was completed on
October 1, 2004 (between Xinjiang and Shanghai). Commercial operation is envisaged from January
2005, with the objective of supplying 12 billion cubic meters per year by 2007.
National oil reserves plan
In March 2003, an Energy Department was established in the National Development and Reform
Commission. National oil reserves are planned in Dalian (Liaoning Province), Huangdao (Shandong
Province), Zhenhai and Zhoushan (Zhejiang Province), which will be completed in 2006-2008. Its aim is
to stockpile oil equivalent to 90 days’ imports by 2015.
Overseas resource
Overseas resource development is to be accelerated with the restructuring of the three major oil
development
corporations (CNPC, SNPC and CNOOC). Agreements have been reached in Kazakhstan, Sudan,
Indonesia and Australia among others mainly for the acquisition of interests in oil and gas fields and theconstruction of pipelines.
Sources : National Development and Reform Commission website, etc.

30

Development Bank of Japan Research Report/ No. 48

40II. Japanese Economy: Steady Recovery Continues
Overview: World Economy Holds the Key to Sustained Recovery
Figure 2-1. Trends in Real GDP(annualized rate of change from the previous quarter by component, seasonally adjusted)(%) 5/97

1/99

1/02

10/00

10

Government
consumption

8
6
4

Exports2

Private consumption
Business investment
Inventory investment
Public investment

0
-2
-4

Imports(reverse sign)-6
Quarter-on-quarter change in GDP-8-10(CY quarterly basis)

Residential investment-1297
Notes :

Source :

98

99

00

01

02

1/99

10/00

1/02
10

Construction activity index(2000=100, weight: 7.0%)

Tertiary industry activity index(2000=100, weight: 60.4%)

105
100
95
90
Industrial production index(2000=100, weight: 20.2%)

85(CY quarterly basis)

80
97

98

99

00

Figure 2-3. Inventory Cycle

01

02

03

Change in shipments on previous year (%)

5/97
110

04

1. 1995 as base year.
2. Contribution to annualized GDP is prorated to each item based on its share in contribution before annualization. Government
consumption includes the contribution of public inventories.
Cabinet Office, “National Accounts.”

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

03(1) Total of mining and manufacturing sector
7-8/04(-1.1,7.0)
10-12/02
03/1-35
7-9/02

10-12/00
4-6/97
10-12/03

4-6/03

7-9/030
4-6/02

1-3/994-6/01-5-10

1-3/02

7-9/01
10-12/01

-15
-15

04

-10

-5

0

5

10

Change in inventories on previous year (%)
Notes :

(2) Electronic components and devices
40
Change in shipments on previous year (%)

1. Weights represent shares in all-industry activity index (GDPfrom the supply side) and add up to 100 in sum with theagriculture, forestry and fishery production index (weight:
1.6%) and public service activity index (10.8%).
2. For July-September 2004, the industrial production figures
represent the average of actual figures for July and August andestimate for September based on the Survey of Manufacturing
Production Forecast. The construction and tertiary industry
figures represent July only.
Source : Ministry of Economy, Trade and Industry

30
20
10
1-3/990

7-8/04(34.2,13.9)

-10
-20
-30
-40
-40

-30

-20

-10
0
10
20
30
40
50
Change in inventories on previous year (%)

Development Bank of Japan Research Report/ No. 48

31

Employment Situation Improves as Job Offers Increase
Figure 2-4. Trends in Ratio of Job Offers to
Applicants and Unemployment Rate(times)0.9

Figure 2-5. Unemployment Rate by
Age Group

(%)

(%)

6

15-24

10

0.8

5

0.7

25-34
8

55-64

4
0.6
3

35-44

6

0.5

45-54

0.4

2

Ratio of job offers to applicants
Unemployment rate (right scale)(CY quarterly basis)

98

02

1

0.3
97

99

00

01

03

4
652

04

(CY quarterly basis)

Note :
Seasonally adjusted.
Sources : Ministry of Internal Affairs and Communications, “Labour Force
Survey;” Ministry of Health, Labour and Welfare, “Statistics on
Placement Activities.”

0
97

98

99

00

01

02

03

04

Note :
Seasonally adjusted.
Source : Ministry of Internal Affairs and Communications, “Labor
Force Survey.”

Figure 2-6. Trend of Year-on-Year Change in Number of Workers and Employees by Component(1) By industry (new industrial classification)(2) By status(10,000 persons)(10,000 persons)

100

110

50

60

0

10

-50

-40

-100

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

-140
99

00

01

02

Construction
Wholesale and retail trade
Services
Total

03

04

97

Manufacturing
Transport
Others

98

99

00

01

02

03

04

Employees (temporary and daily)
Employees (regular)
Self-employed and family workers
Total number of workers

Figure 2-7. Overtime Hours(seasonally adjusted)(3) By size of corporation (excluding agriculture,
forestry, fisheries and government)(index, 2000=100)(10,000 persons)120
500 employees or over
30-499 employees
1-29 employees
Total

100
50

All industries
Manufacturing
110

0

100

-50

90
(CY quarterly basis)(CY quarterly basis)

-100

80
97

98

99

00

01

02

03

04

Source : Ministry of Internal Affairs and Communications, “Labour Force
Survey.”32

Development Bank of Japan Research Report/ No. 48

97

98

99

00

01

02

03

04

Source : Ministry of Health, Labour and Welfare, “Monthly Labour
Survey.”Income Holds Steady

Figure 2-8. Year-on-Year Change in Wages andSalaries per Person

Figure 2-9. Nominal Compensation of
Employees(¥trillion)

(%)
4

285
Bonus and special earnings

3

Overtime pay

280

Regular wages and salaries
2

Total wages and salaries
275

1
0

270

-1

265

-2
260
-3
(CY quarterly basis)(CY quarterly basis)
255

-4
97

98

99

00

01

02

03

97

04

Figure 2-10. Consumption on GDP Basis

00

01

02

03

04

Figure 2-11. Nominal Living Expenditure of
All Households(year-on-year change by component)(¥trillion)

(%)

99

Seasonally adjusted annual rate.
Note :
Source : Cabinet Office, “National Accounts.”

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

4

98

330

3

320

2

(%)

Real private final consumption expenditure
Change on previous year

2
0

310

-2

300

-4

290

1
0
-1
-2

-6

280
-3

-8

270

-10

260
97

98

99

00

01

02

03

04

-4
-5
99

00

01

(CY quarterly basis)
Note :
Source :FoodFuel, light & water charges
Clothes and footwear
Transportation & communication
Reading & recreation
Total living expenditure

Seasonally adjusted annual rate.
Cabinet Office, “National Accounts.”

02

03
04
(CY quarterly basis)
Housing
Furniture & household utensils
Medical care
Education
Others

Note :

Data for July-September 2004 represent average for July andAugust.
Source : Ministry of Internal Affairs and Communications,“Family Income and Expenditure Survey.”

Development Bank of Japan Research Report/ No. 48

33

Retail Sales Bottoming Out as Consumer Confidence Improves

Figure 2-12. Retail Sales Index(seasonally adjusted)
105

Figure 2-13. Retail Sales by Type of Operation（1Q/97=100）
Textiles, clothing, personal
items, foods and beverages

100

14

(¥ trillion)

12
Householdmachines/appliances

95

10
8

Retailindustry total

90

6
4

85
2
80

0
91

Automobiles
75(CY quarterly basis)

00

03
(CY)

Supermarkets
DIY stores
Direct marketing

1. Data for convenience stores (before FY1997) and direct
marketing represent annual values.
2. Data for convenience stores are taken from “Small-scale
General Merchandise Store Chains in Japan” for the years
to 1996 and from “Report of the Current Survey ofCommerce” since 1997.
Sources : Ministry of Economy, Trade and Industry, “Report of theCurrent Survey of Commerce;” Itemize, “Small-scale General
Merchandise Store Chains in Japan;” Home Center Institute,“Home Center Directory;” Japan Direct Marketing Association;
Nippon Electric Big-Stores Association (NEBA).

98
99
00
01
02
03
04
Retail sales index except for total represents theaverage of published seasonally adjusted figures
weighted by the sales of each industry.
2. Data for July-September 2004 represent average forJuly and August.
Ministry of Economy, Trade and Industry, “Report of
the Current Survey of Commerce.”
1.

Source :97

Notes :

70
97
Notes :

94

Department stores
Convenience storesElectric stores (association members)

Figure 2-14. Consumer Confidence Indicators(2) Other Confidence Indexed(1) Quarterly change in consumer confidence index
6

(%)

180

4

160

2

140

Living Insecurity Index

0120

Improvement

-2
100

-4

Nikkei Consumption Forecast Index

Improvement

80

-6

(CY)

(CY quarterly basis)

-8

60
97

98

99

00

01

02

03

04

Overall livelihood

Income growth

Price inflation

Willingness to buy durable goods

Employment

Consumer confidence index

34

Development Bank of Japan Research Report/ No. 48

97
Note :

98

99

00

01

02

03

04

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.

Business Investment Increases in Manufacturing and Non-Manufacturing
Figure 2-15. Year-on-Year Change in Nominal Business Investment and Investment Profitability
Manufacturing (corporations of all sizes)(%)

40

Year-on-year change in business investment
Investment profitability in manufacturing (right scale)

30

14

30

Non-manufacturing (corpoations of all sizes)(%)

6Year-on-year change in business investment
Investment profitability in manufacturing (right scale)

12

20

20

10

10

4

10

8

0

3

0

6

-10

4

-10

2

-20

2

-20

1

0

-30

-30
97

98

99

00

01

02

03

5

0
97

04

98

99

00

01

(CY quarterly basis)

02
03
04
(CY quarterly basis)

Notes :

1. Business investment excludes software.
2. 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).
Sources : Ministry of Finance, “Quarterly Report of Statistical Survey of Incorporated Enterprises,” etc.

Figure 2-16. Machinery Orders (change on previous year)

40

Manufacturing

(%)

30

30

Non-manufacturing(excluding ships and electric power)

(%)

20

20
10

10

0

0

-10

-10

-20

-20

-30

(CY quarterly basis)-40(CY quarterly basis)
-30

97

98

99

ChemicalsElectric machinery
Manufacturing

00

01

Iron/steel
Automobiles

02

03

04

97

98

99

Note : Data for July-September 2004 represent average for July and August.
Source : Cabinet Office, “Orders Received for Machinery.”

01

02

03

04

Figure 2-18. Capacity Utilization Index and
Diffusion Index of Production Capacity

Figure 2-17. Floor Area of Building Construction
Started (by use) (change on previous year)(%)(seasonally adjusted, 2000=100)

30

00

OthersReal estate
Finance/insurance
Wholesale/retail
Telecommunications
Construction
Non-manufacturing (excluding ships and electric power)

General machinery
Others(reversed scale, “excessive” – “insufficient,” %)115-5Diffusion index of production capacity in non-manufacturing (right scale)

20

110

10

105

0

100

-10

95

-20

90

-30

85

0
5
10
Manufacturing capacity utilization index

15
20
25

97

98
OfficeFactory
Others

Source :

99

00

01

30
Diffusion index of production capacity in manufacturing (right scale)

02
03
04
(CY quarterly basis)

96

Store
Warehouse
Non-residence total (private)

Note :

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

97

98

99

00

01

02

03

35
04

(CY quarterly basis)

Sources :The diffusion index of production capacity has a discontinuity due toa revision to its coverage in March 2004.
Ministry of Economy, Trade and Industry, “Industrial Index;” Bank ofJapan “Short-term Economic Survey of Enterprises in Japan (Tankan ).”Development Bank of Japan Research Report/ No. 48

35

Residential Investment Stays Flat
Figure 2-20. Housing Starts(trend of year-on-year change by component)

Figure 2-19. Trend of Housing Starts(seasonally adjusted annual rate)(%)(10,000 units)
160
Owner-occupied houses
Company’s houses

140

Housing for rent
Housing for sale

5

120
100

-5

80
60
-15

40
20

Owner-occupied houses
Company’s houses
Total(CY quarterly basis)

Housing for rent
Housing for sale

(CY quarterly basis)

-25

0
97
Source :

98

99

00

01

02

03

97

04

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

Year-on-year change in construction starts forowner-occupied houses

Increase

24

-20

22

-40

20

-60

03

04

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

18

Diffusion index of orders received for singledwelling custom-built houses(CY)

Decrease
99

00

01

02

03

(CY quarterly basis)
16
97

04

The diffusion index figures for Q3 and Q4 2004 are estimates.
Note :
Sources : Ministry of Land, Infrastructure and Transport, “New
Dwellings Started;” Government Housing Loan Corporation,“National Housing Market Survey.”(1,000 units)

(％)

40
20

99

00

01

02

03

04

Figure 2-24. Condominium Prices as Comparedwith Annual Income(Tokyo metropolitan area, new construction)(times)
12
10

30

98

Source : Cabinet Office, “National Accounts.”

Figure 2-23. Contract Rate and Stock of
Condominiums (Tokyo metropolitan area)
50

02

26

0

98

01

28

20

97

00

( trillion yen)(%, % points)

-80

99

Figure 2-22. Real Residential Investment(seasonally adjusted annual rate)

Figure 2-21. Year-on-Year Change in Construction
Starts for Owner-Occupied Houses and Diffusion
Index of Orders Received
40

98

9
8

8
7

10

6

0
-10

4

-20
-30

(CY quarterly basis)

-40
97

98

99

00

01

02

03

6

2

5

0

4

(CY)

04

90

92

94

96

98

00

02

Term-end stock (right scale)
Change in marketed units on previous year

Note :

Contract rate refers to the quarterly average of the percentage
of housing sales contracts that were actually closed fromamong 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.

36

Development Bank of Japan Research Report/ No. 48

Note :

Average price of condominiums per 70 square meters divided
by average annual income of worker’s households (for Tokyo
metropolitan area including parts of Kanagawa and Chiba
Prefectures).
Sources : Real Estate Economic Institute Co., Ltd., “Trends in
Condominium Market;” Ministry of Public Management,
Home Affairs, Posts and Telecommunications, “Family Income
and Expenditure Survey;” Mitsui Fudosan, “Statistics on
Real Estate.”

Constant Decline in Public Investment due to Financial Squeeze
Figure 2-25. Public Investment and Government
Consumption

Figure 2-26. Trend of Contract Value for
Public Works(change on previous year, %)(As % of GDP)

20

25

Government final consumption

CentralOthers

20

Local
Total

15

15

10
5

Public fixed capital formation

10

0
-5
5

-10
-15
(CY quarterly basis)

0(quarterly basis)

(FY)
-20

91

92

93

94

95

96

97

98

99

00

01

02

03

04

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.”

Note :

Source :Figure 2-27. Long-term Outstanding Debts ofCentral and Local Governments
(%)
200

700

175

600

04

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

Figure 2-28. International Comparison of
Financial Situations(¥ trillion)
800

02 03

Japan

U.S.

EU15

(1) General government debts/Nominal GDP

150
500

Forecast

125

400

100

300

75
50

200

(%)
10

100
0
(FY)

-100

91 92 93 94 95 96 97 98 99 00 01 02 03 04
Duplication
Debts of local governments
Debts of central government

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05(2) Primary balance/Nominal GDP

5
Forecast

0-5-10(Calendar year)

Excluding special account for postal services and postal savings
Total

Notes :

1. Figures for fiscal 2003 represent estimates after
supplementary budget and those for fiscal 2004 areestimates 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 (August 2004).”

Notes :

Source :1. Values for 2004 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).
OECD, “Economic Outlook 75 (June 2004).”

Development Bank of Japan Research Report/ No. 48

37

Exports Slow, Current Account Surplus Reaching PeakFigure 2-29. Trends in Foreign Exchange Rate
100

(¥/$)

(2000=100)(2000=100)
110
100

120

90
80
Real effective exchange
rate of yen (right scale) (monthly basis)

150
99

00

Imports

110
105
100

Currency appreciation
130
140

120
115

Yen/dollar rate

110

Figure 2-30. Export and Import Quantum Indices

01

02

03

70

95
90
Exports

85
60(monthly basis)

80

04

99

00

01

02

03

04

Source : Ministry of Finance, “Trade Statistics.”

Source : IMF

Figure 2-31. Export Value by Region

Figure 2-32. Trade Balance on Customs
Clearance Basis(year-on-year change by component)(change on previous year, %)
10

20
15

(annualized change on previous year, ¥ trillion)

5

10
5

0

0

-5

-5
-10
-10

(CY quarterly basis)

-15
99

00

01

China
EU

02

03

Asia
Others

99

04

00

01

02

Export volume
Import volume
Fuel import prices

U.S.
World

Note :
Asia excludes China.
Source : Ministry of Finance, “Trade Statistics.”

03

04

Export prices
Import (excluding fuel) prices
Trade balance on customs clearance basis

Source : Ministry of Finance, “Trade Statistics.”

Figure 2-33. Current Account Balance25(CY quarterly basis)-15(annual rate, ¥ trillion)

Figure 2-34. Balance of Payments and Change in
Foreign Exchange Reserves(annual rate, ¥ trillion)

80

20

60

15

40

10

20

Change in foreign exchange reserves
Capital account balance
Current account balance

0

5

-20

0

-40

-5

-60

-10

-80
99

00

01

Trade balance
Income balance
Current account balance

02

03
04
(CY quarterly basis)
Service balance
Current transfers

Note :
Seasonally adjusted.
Sources : Ministry of Finance; Bank of Japan, “Balance of Payments.”

38

Development Bank of Japan Research Report/ No. 48

99
Note :

00

01

02

03
04
(CY quarterly basis)

Seasonally adjusted figures for current account balance.
Raw data for others.
Sources : Ministry of Finance; Bank of Japan, “Balance of Payments.”

Trade Dependency Edges up as Relationship Strengthens between Exports andDomestic Production

Figure 2-35. Exports and Imports as % of GDP

Figure 2-36. Exports of Japan by Destination(% of GDP)(share, %)
100

16

11.4

14
Exports

80

10.8

60
6.4

12

12.8

10

Imports

8

23.5
40

7.1

12.2

Asia total 20
26.3
37.1
0

24.6
85
90
U.S.
Other Asia

(CY quarterly basis)
6
80

82

84

86

88

90

92

94

96

98

00

02

95

Asia total
46.4

00
China
EU

03 (CY)
NIEs
Others04

Note :
Seasonally adjusted nominal values.
Source : Cabinet Office, “Preliminary Estimates of National
Expenditure.”

Note :
Data for EU cover 15 countries.
Source : Ministry of Finance, “Trade Statistics.”

Figure 2-37. Export Ratio and Import
Penetration in Industrial and Mining Sector
20

15.3

Figure 2-38. Coefficient of Correlation between
Exports and Production(%)
0.6
Export ratio

18
16

0.5

14
12
Import penetration

10

0.4

8
6
(CY)

(CY monthly basis)

0.3

485 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
Note :

Export ratio = exports/shipments
Import penetration = imports/aggregate supply
Source : Ministry of Economy, Trade and Industry, “Analysis ofIndustrial Production Activities.”

85

87

89

91

93

95

97

99

01

Note :

The coefficient of correlation is calculated on amonthly basis for the growth of exports and production
on three months earlier during the previous 10 years.
Sources : Ministry of Finance, “Trade Statistics;” Ministry of
Economy, Trade and Industry, “Industrial Index.”

Development Bank of Japan Research Report/ No. 48

3903

Import Prices and Corporate Prices on the Rise
Figure 2-39. Trends in Corporate Goods Prices (domestic demand products)(change on previous year, %)
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0

(CY quarterly basis)
01

02

03

EnergyNon ferrous metals
Corporate goods prices

04
Iron/steel and building materials
Chemicals and plastics

Machinery
Foodstuffs

Figure 2-40. Trends in Corporate Service Prices(change on previous year, %)

2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5

(CY quarterly basis)
96

97

98

99

Transportation (overseas factor)
Leasing and rental
Information services
All items (excluding overseas factor)

00

01

02

Transportation (domestic factor)
Miscellaneous services
Communications and broadcasting

03

04

Real estate
Finance and insurance
Advertising services

1. In Figure 2-39, “Machinery” includes electrical machinery & equipment, general machinery & equipment, precision instruments and transportation equipment.
“Iron/steel and building materials” includes iron & steel, metal products, ceramic, stone & clay products, lumber & wood products and scrap & waste. “Energy”
includes electric power, gas & water, oil & coal products and minerals. “Others” includes agriculture, forestry & fishery products, processed foodstuffs,
other manufacturing industry products, pulp, paper & related products and textile products.
2. In Figure 2-40, “Transportation (overseas factor)” includes ocean freight transportation, international air freight transportation and international air passenger
transportation.
Source : Bank of Japan, “Price Indexes Monthly.”Notes :

Figure 2-42. Corporate Prices andConsumer Prices

Figure 2-41. Trends in Import Price Index(contractual currency basis)(change on previous year, %)(change on previous year, %)
15

40

10

30

5

20

0

10

-5

0
-10

-10
(CY quarterly basis)

-15
96

97

98

99

Metals & related products
Oil, coal & natural gas
Machinery & equipment
Contractual currency basis

Source :

00

01

02

03

04

71

74

Wood, lumber & related products
Chemicals & related products
Foodstuffs & feedstuffs
Yen basis

Bank of Japan, “Price Indexes Monthly.”

40

-20

Development Bank of Japan Research Report/ No. 48

77

80

83

86

89

92

95

98

01

04

Consumer prices (excluding fresh food)Corporate prices (domestic demand products)
Sources :Ministry of Internal Affairs and Communications,“Monthly Report on Consumer Index;” Bank of Japan, “Price
Indexes Monthly.”Weakened Linkage between Consumer and Corporate Prices since Late 1990s

Figure 2-43. Trends in Consumer Prices (excluding fresh food)Goods(change on previous year, %)
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
96

97
98
Food (excluding fresh food)

99
Food products00
Textiles01
Petroleum products

02

03
Other industrial products

04

03

04

Total

Services(change on previous year, %)
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
96

97

98

99

Public services
Notes :

Source :

00

Rent

01

02

Other personal services(%)-5 -4 -3 -2 -1

0

1

2

June 1970 – May 1980
June 1990 – August 2004

Sources :Figure 2-45. Correlation between
Corporate and Consumer Prices(%)

Antecedence of corporate prices
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
-0.1

(months)

Note :Total

1. “Other personal services” includes publications. “Public services” includes electricity, gas and watercharges.
2. “Rent” includes private house rent and imputed rent.
3. Data for Q3 2004 represent July-August average.
Ministry of Internal Affairs and Communications, “Monthly Report on Consumer Price Index.”Figure 2-44. Timing Correlation between Corporate andConsumer Prices
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
-0.1

Eating out

3

4

5

6

7

8

9 10 11 12June 1980 – May 1990

81
Notes :

Corporate prices cover domestic demand products. Consumer prices do notinclude fresh food.
Ministry of Internal Affairs and Communications, “Monthly Report on
Consumer Price Index;” Bank of Japan, “Price Indexes Monthly.”
Sources :

83

85

87

89

91

93

95

97

99

01

03

1. Corporate prices cover domestic demand products. Consumer
prices do not include fresh food.
2. The coefficient of correlation is calculated for monthly change(on three months earlier) during the previous 10 years.
3. As regards the shaded portion (since April 2000), it cannot be
said with a significance at the 5% level that the coefficient ofcorrelation is not zero.
Ministry of Internal Affairs and Communications, “Monthly Report on
Consumer Price Index;” Bank of Japan, “Price Indexes Monthly.”

Development Bank of Japan Research Report/ No. 48

41

Easy Money Policy Continues
Figure 2-46. Monetary Base and Money Stock(times)(change on previous year,%)Monetary base
Money stock (M2+CD)

25

12

0.95

35
30

Figure 2-47. Velocity of Money andCredit Multiplier
Velocity of money
Credit multiplier (right scale)

0.90

11
10

0.85

9

20
0.80

15
10

0.75

5

0.70

8
7

(CY quarterly basis)

0(CY quarterly basis)

-5

6
97

98

99

00

01

02

03

04

Notes :
97

98

99

00

01

02

03

1. Change on previous year is based on average balance for eachquarter.
2. Credit multiplier = (M2+CD)/monetary base.
Velocity of money = nominal GDP/(M2+CD).
Both are seasonally adjusted.
Sources : Cabinet Office, “Annual Report on National Accounts;” Bankof Japan, “Financial and Economic Statistics Monthly.”04

Source : Bank of Japan, “Financial and Economic Statistics Monthly.”

Figure 2-48. Loans and Discounts Adjusted forSpecial Items

Figure 2-49. Loans and Discounts Outstanding byCategory of Borrower(change on previous year, %)(change on previous year,%)

3

2

2

Private bank loans
After adjustments for extraordinary factors

1

1
0

0

-1

-1

-2

-2

-3

-3

Individuals
Manufacturing-4-4

Three major non-manufacturing industries-5-5

Other non-manufacturing industries-6-6

Others-7-7

Total amount outstanding

03
04(monthly basis)

97

Adjustments for extraordinary factors include adjustments forfluctuation caused by the mobilization or amortization of
credited loans.
Source : Bank of Japan, “Financial and Economic Statistics Monthly.”Notes :

97

98

99

00

01

02

Note :

99

00

01

02

03

04

(CY quarterly basis)

1. Data represent the total of domestically licensed banks’ banking
accounts and trust accounts. The borrowing sector of “finance”
does not include deposit-taking institutions.
2. The three major non-manufacturing industries include
construction, wholesale & retail and real estate.
Source : Bank of Japan, “Financial and Economic Statistics Monthly.”

Figure 2-50. Diffusion Index of Lending
Attitude of Financial Institutions

Figure 2-51. Selected Interest Rates(“accommodative” – “severe,” % points)
2.0

40

98

(%)

Large-sized corporations
SMEs

30

1.5

20
10

1.0

0
-10

0.5
Three months moving average-20(CY quarterly basis)

-30
97

98

99

00

01

02

03

04

The diffusion index of lending attitude of financial
institutions has a discontinuity due to a revision to its
coverage in March 2004.
Source : Bank of Japan, “Short-term Economic Survey of Enterprises
in Japan (Tankan ).”

0.0
00

42

Development Bank of Japan Research Report/ No. 48

01

02

03

04

Inter-bank overnight lending rate
Three-month CDs
Yield on 10-year government bonds
Average contracted interest rate on new loans

Note :

Note :

Average contracted interest rate on new loans is based onmonthly statistics. Others represent the monthly averages ofdaily closing prices.
Sources : Nihon Keizai Shimbun; Bank of Japan, “Financial andEconomic Statistics Monthly.”III. Medium-term Outlook of the Japanese Industrial Structure
Changing Industrial Structure
Figure 3-1. Trends in Real Output

Composition
68SNA

(%)

(¥ trillion)

(%)

350

100

100

300

80

80

250

60

60

200

40

40

150

20

20

100

0

0

50

1980

85

0
1980

85

90

95

2000 02 (CY)

Manufacturing
Services
Tertiary sector (excluding services)
Others

93SNA

90
95
90
OthersTertiary sector (excluding services)
Services
Manufacturingng

2002

Notes :

1. Data on real output have a discontinuity as they are based on
68SNA until 1989 and on 93SNA since 1990.
2. Adjustments are made for imputed rent included in real estate.
3. These Notes and Source also apply to the following three Figures.
Source : Cabinet Office, “Annual Report on National Accounts.”

Figure 3-2. Trends in Real Value Added (GDP)Composition
200

(%)

(¥ trillion)

100
80

150

60
100

40

50

20

0

0
1980

85

90

95

2000 02 (CY)

1980

85

Figure 3-3. Trends in Nominal Value Added (GDP)200(¥ trillion)

90

95

2002

95

2002

95

2002

Composition
100

(%)

80

150

60
100
40
50

20

0

0
1980

85

90

95

1980

2000 02 (CY)85

Figure 3-4. Trends in Number of
Employed Persons(10,000 persons)Composition

(%)

2,000

100

1,800

80

1,600

60

1,400

40

1,200

20

1,000

90

0
1980

85

90

95

2000 02 (CY)

1980

85

90

Development Bank of Japan Research Report/ No. 48

43

(Reference) International Comparison of Change in Industrial Structure

Figure 3-5. Share of Industries in Nominal GDP
(%)
35

30

25

20

Notes :

15

U.S.
FranceGermanyJapan

Sources :1080 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03

1. Industries include electric power.
2. U.S. data have a discontinuity between
1997 and 1998 due to a change inthe coverage of the manufacturing sector.
Cabinet Office, “Annual Report on National
Accounts;” U.S. Department of Commerce;
OECD.

(CY)

Figure 3-6. Share of Manufacturing in Employment(%)
30

Notes :

25

20

15

U.S.
FranceSources :GermanyJapan

1080 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03

1. Data indicate the share of manufacturingin the number of persons employed in
the private sector for Japan, U.S. andFrance, and the share of industries(including electric power) in the total
number of persons employed for Germany.
2. U.S. data have a discontinuity between
1997 and 1998 due to a change in the
coverage of the manufacturing sector.
Cabinet Office, “Annual Report on National
Accounts;” U.S. Department of Commerce;
Direction Générale de l’Institut National dela Statistique et des Etudes Economiques(INSEE) ; Statistisches Bundesamt (StBA).

Figure 3-7. Disparity in GDP Deflator Growth(Industrial Deflator Growth – Non-industrial Deflator Growth)3(% points)

2

U.S.

1

Germany0France

-1
-2

Japan

-3
-4
-5
-6

Note : The same as in Figure 3-5.

-7
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
(CY)

44

Development Bank of Japan Research Report/ No. 48

-20
-30

-30

-40

Source :Consumption

Private capital formation

Net increase in inventories

Public capital formation

Exports

Intermediate input

Confounding term

Value of production

200
-2000

10
20

10

0

-10
-10
0

-20
Advanced processing x

Primary processing x

Manufacturing x

Development Bank of Japan Research Report/ No. 48

Tertiary sector excludingx
services and energyx

Tertiary sector excludingx
services and energyx

Energy x

30

Energy x

40Service activities x(4) 1995-2002

Service activities x

30

Advanced processing x(3) 1990-95

Primary processing x

50

Manufacturing x

40
Construction x-20Construction x

20
Agriculture, forestry, xfishing and mining x

Tertiary sector excludingx
services and energyx

Energy x

Service activities x

Advanced processing x(1) 1980-85

Agriculture, forestry, xfishing and mining x

Tertiary sector excludingx
services and energyx

Energy x

Service activities x

Advanced processing x

Primary processing x

Manufacturing x

Construction x

Agriculture, forestry, xfishing and mining x

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

Primary processing x

Manufacturing x

Construction x

Agriculture, forestry, xfishing and mining x

Structural Change in Consumer Demand and Intermediate Input Promotes Trend toward
Service Economy

Figure 3-8. Change in Industrial Structure by Component (real output, ¥ trillion)

100(2) 1985-90

80

60

40

20
0

Cabinet Office, “SNA Input-Output Table.”45

Change in Intermediate Input Structure
Figure 3-9. Changing Share of Each Industry inIntermediate Input in Other Industries(1995-2002)
Service activities
Finance and insuranceElectrical machinery
Electricity, gas and water supply
Transport and communications
Real estate
Government services
Non-profit services
Transport equipment
Precision instruments
Chemicals
Machinery
MiningPulp and paper
Food products and beverages
TextilesConstruction
Non-metallic mineral products
Petroleum and coal products
Agriculture, forestry and fishing
Basic metal
Fabricated metal products
Other manufacturing
Wholesale and retail trade

Goods rental and leasing
Information services
Automobile rental andleasing
Legal, financial andaccounting services
Advertising
Civil engineering andarchitectural services
Engineering(% points)-2

Note :

Figure 3-10. Growth of Service Sector(2003 values, 1993 = 100)

-1

0

1

2

Personal services

3

Intermediate input from the industry to other industries/total intermediate
input in other industries.
Cabinet Office, “SNA Input-Output Table.”

Source :Figure 3-11. Changing Share of Services inIntermediate Input in Each Industry(1995-2002)

Construction
Transport and communications
MiningService activities
Fabricated metal products
Finance and insurance
Machinery
Agriculture, forestry and fishing
Other manufacturing
Electricity, gas and water supply
Food products and beverages
Non-metallic mineral products
Precision instruments
Pulp and paper
TextilesChemicals
Real estateTransport equipment
Basic metal
Wholesale and retail trade
Petroleum and coal productsElectrical machinery

Note :
Source :

46

0

2

4

6

Source :25

50

75 100 125 150 175 200

Ministry of Economy, Trade and Industry, “Indicesof Tertiary Industry Activity.”

Figure 3-12. Changing Share of Electrical
Machinery in Intermediate
Input in Each Industry(1995-2002)
10.1
5.9

Electrical machinery
Precision instruments
Transport equipment
Non-metallic mineral products
Construction
Service activities
MiningBasic metal
Real estate
Other manufacturing
Agriculture, forestry and fishing
MachineryTransport and communications
Food products and beverages
Electricity, gas and water supply
Pulp and paper
TextilesFabricated metal products
ChemicalsPetroleum and coal products
Finance and insurance
Wholesale and retail trade(% points)
-2

0

-0.5

8

Intermediate input from services to the industry/totalintermediate input in the industry.
Cabinet Office, “SNA Input-Output Table.”

Development Bank of Japan Research Report/ No. 48

Note :
Source :(% points)
0.0

0.5

1.0

1.5

2.0

2.5

3.0

Intermediate input from electrical machinery to the industry/totalintermediate input in the industry.
Cabinet Office, “SNA Input-Output Table.”Consumption Structure Also Points to Trend toward Service Economy
Figure 3-13. Final Consumption Expenditure of Households(%)

Others100

Restaurants and hotels
Education

80

Recreation and culture
Communication
60
Transport
Health40
Furnishings, household equipment andhousehold services
Housing, electricity, gas and water supply
20

Clothing and footwear
Food, beverages and tobacco

080Note :
Source :

85

90

95

Share of spending on services

(CY)

02

Final consumption expenditure of households is at constant (1995) prices. Imputed service of owner-occupied dwellings is
excluded from its composition.
Cabinet Office, “National Accounts.”

Figure 3-14. Change in Final Consumption
Expenditure of Household by Industry(1995-2000)(¥ billion)
Manufacturing
Food products and beverages

Electrical machinery

4,333
18,482Wholesale and retail

1,258

Finance and insurance

1,995

Real Estate

6,820

Communications

6,114

Service activities

4,530

Public services

2,157

Business services

398

Personal services

1,975

Note :
Source :Communications

Non-manufacturing
Manufacturing-1,636
2,113

Total

change from 1995 to 2002 (%)
120

2,247

Petroleum and coal products

Non-manufacturing

Figure 3-15. Inducement Coefficient ofHousehold Consumption

20,72990

60
Electrical machinery
30
Public services

Business services
Real estate0

RetailPersonal services

Food & beverages-30
TextilesInducement coefficient (2002)

-60
0

0.05

0.1

0.15

0.2

0.25

Final consumption expenditure of households is at constant prices.
Cabinet Office, “SNA Input-Output Table.”

Development Bank of Japan Research Report/ No. 48

47

Changing Consumption Structure due to Aging

Figure 3-16. Consumption Structure by Age Groupof Household Head

Figure 3-17. Consumption Structure in All Japanand Chugoku and Shikoku Districts

(%)

(%)

100

Miscellaneous

100

Reading & recreation

80

80

Education

60

60

Transportation &communication
Medical care40

Clothes & footwear

40

Furniture and household
utensils
Fuel, light & water
charges20

20

Housing00
All agegroups
Notes :

〜29

30〜39 40〜49 50〜59 60〜69

2001-2003 average.
“Miscellaneous” does not include transfer expenditure
to other households, such as social expenses andallowance money.
Source : Ministry of Internal Affairs and Communications,“Family Income and Expenditure Survey.”
1.
2.

Food

All Japan

70〜

Chugoku andShikoku Districts

1999 data.
“Miscellaneous” does not include transfer expenditure
to other households, such as social expenses andallowance money.
Source : Ministry of Internal Affairs and Communications, “National
Survey of Family Income and Expenditure.”

Notes :

1.
2.

Figure 3-18. Change in Consumption Expenditure by Item (2000-2010)

Package tour expenses
Health and medical care services
Hairdressing and beauty services
Other cultural and recreational services
Lodging charges
Housework services
Clothing-related services(¥100 million)
0

1,000

2,000

3,000

Sources : Cabinet Office, “National Accounts;” Ministry of Internal Affairs and Communications, “Family Income and Expenditure Survey.”48

Development Bank of Japan Research Report/ No. 48

4,000

0.8
(annual average, %)

3

2
2

1
1

0
0

-1
-1

-2
-2

-3
-3

Real GDP growth
Increase in persons employed
0.8

0.6
0.6

0.4
0.4

0.2
0.2

0.0

0.0

-0.2

-0.2

-0.4

-0.4

Late 90s-2000s

Manufacturing

Early 90s-late 90s

4Nominal growth
Real growth
Deflator
Persons employed

Late 80s-early 90s

7

Early 80s-late 80s

5Late 90s-2000s

6

Early 90s-late 90s

Late 80s-early 90s

Early 80s-late 80s(annual average, %)

Fo
od
pro
du
Pu
cts
lp,
and
p ap
b ev
er
a
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n
dp
Pe
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No troler p tile
n-m umeta and C rodu s
Elellic co hem cts
ct r
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Fa
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a l dur
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ach
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i ne
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Tra ent MachductsanPre spo nd s inery
Ag
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res nuf men
Elet r y ac t s
ctr
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trsg
Fin ale anwater uctioTra
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ivi
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Fo
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Pe
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No troler p tile
n-m umeta and C rodu s
Elellic co hem cts
ct r
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Fa
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ach
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i ne
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Pre spo nd s ineryAg
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ure er ins m, fo ma tru ent
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Eletry ac nts
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and turiici
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sal w tru geac
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m
Se
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ivi
tie
s

Growth Factor by Industry as Observed in Growth Accounting (1)Figure 3-19. Economic Growth and Increase in Persons Employed by Industrial Sector
Tertiary sector

7

6

5

4

3

Source : Cabinet Office, “Annual Report on National Accounts.”

Figure 3-20. GDP Growth and Increase in Persons Employed by Industry

Growth from 1980 to 1990
Growth from 1990 to 2002

(contribution to all-industry growth, annual average %)(contribution to all-industry growth, annual average %)

1.0
1.0

Real GDP growth
Increase in persons employed

Source : Cabinet Office, “Annual Report on National Accounts.”

Development Bank of Japan Research Report/ No. 48

49

Growth Factor by Industry as Observed in Growth Accounting (2)Figure 3-21. GDP Growth by Factor
Manufacturing

All industries(annual average, %)
6
5
4
3
2
1
0
-1
-2
-3
85-90

90-95

(annual average, %)
6
5
4
3
2
1
0
-1
-2
-3

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

TFP
CapitalLabor
Growth rate

80-85

Tertiary sector(annual average, %)

80-85

95-02

85-90

Electrical machinery

90-95

80-85

95-02

90-95

95-02

Services(annual average, %)(annual average, %)

25

5

20

4

15

3

Imputed rent is excluded from realestate.
Sources : Cabinet Office, “Annual Report on
National Accounts” and “Gross
Capital Stock of Private Enterprises;”
Ministry of Economy, Trade andIndustry, “Indices of Industrial
Production” and “Indices of Tertiary
Industry Activity.”

Note :

2

10

1

5

0

0

-1
-2

-5
80-85

85-90

85-90

90-95

80-85

95-02

85-90

90-95

95-02

Figure 3-22. Relationship between Productivity and Deflator (21 industries)
1990-2002
4

TextilesElectricalmachinery

Chemicals
-6

-4

-2

0

2

4

6

8

10

12

(rise in TFP, %)(rise in deflator, %)(rise in deflator, %)1980-1990
8
6
4
2
0
-2
-4
-6
-8

2
0
-2
-4
-6

Electricalmachinery

-8
-6

-4

-2

0

2

4

6

Data indicate average annual increase.
Note :
Sources : Cabinet Office, “Annual Report on National Accounts” and “Gross Capital Stock of Private Enterprises;” Ministry of
Economy, Trade and Industry, “Indicates of Industrial Production,” etc.

50

Development Bank of Japan Research Report/ No. 48

8(rise in TFP, %)Industrial Structure in 2020 (1) (Assumption of Potential Growth Rate)
Figure 3-23. Projected Population and Number of Persons Employed
Forecast
14,000(%)(10,000 persons)

75
Labor force participation rate (right scale)

12,00070
10,000
65

8,000
6,000

60

4,000
55
2,000
50

0
55

60

65

70

75

80

85

Number of persons employed90

Total population

95

00

05

10

15

20
(CY)

Labor force participation rate

Sources : Cabinet Office, “Annual Report on National Accounts;” National Institute of Population and Social Security Research, “Household Projections
for Japan (January 2002)” and “Population Statistics of Japan.”Figure 3-24. Savings Ratio by Sector andPrivate Business Investment Ratio

Figure 3-25. Trends in Potential GDP(change on previous year, %)Forecast

(%)
35

2.0

30
1.5

25
20

1.0

15
0.5

10
5

0.0

0
-0.5

-5
80

85

90

95

00

05

Household savings ratio
Corporate savings ratio
Government savings ratio
Private Business Investment Ratio
Total savings ratio

10

15

20
(CY)

04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20(CY)

TFP: Total Factor Productivity
K: Capital
L: Labor
Potential GDP

Sources : Cabinet Office, “Annual Report on National Accounts” and “Gross Capital Stock of Private Enterprises;” National Institute of Population andSocial Security Research, “Household Projections for Japan (January 2002),” etc.

Development Bank of Japan Research Report/ No. 48

51

-4

-6

(%)

1980

52

1990

2000

Development Bank of Japan Research Report/ No. 48
Ag
ric
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ure
, fo
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Industrial Structure in 2020 (2) (Real Output Basis)

Figure 3-26. Expected Change in Industrial Structure to 2020 (real output basis)(%)(1) Average annual growth (2010/2002)(%)(2) Average annual growth (2020/2010)

8
8

6
6

4
4

2
2

0
0

-2
-2

Investment, exports, etc.

Consumption

-4

-8
Total

-6

2010

Investment, exports, etc.
Consumption
Total

-8

(3) Composition

100
Forecast →90
Tertiary sector excluding services

80

70Services

60

50
Electrical machinery

40

30
Manufacturing (excluding Electricalmachinery)

20
Construction

100Agriculture, forestry, fishing &mining2020

Sources : Cabinet Office, “SNA Input-Output Table” and “Annual Report on National Accounts.”(CY)Industrial Structure in 2020 (3) (Employment Basis)
Figure 3-27. Industrial Structure in 2020 (number of persons employed)(1) Change (2000-2020)(10,000 persons)

800
600
400
200
0
-200
-400

Tra
nsp
o rt

Se
rvi
ce
act
and
iv i
com
tie
Wh
s
m
ole
uni
Ele
sal
cat
ctr
e
ion
and
icit
s
y, g
ret
ail
as
tra
and
de
wa
ter
su p
ply
Ch
em
ica
ls
Mi
Pet
Pu
lp,
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rol
pap
eum
g
er
and
and
coa
pap
l
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Pre
p ro
cis
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ion
t
s
ins
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me
n ts
Re
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No
n-p
n-m
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eta
it s
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erv
mi
i
ces
ner
al p
Tra
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nsp
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ort
s
Fin
equ
anc
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ea
ent
nd
ins
u ra
nce
Te
xti
les
Ma
chi
Fo
n
ery
od
Ba
pro
sic
du
cts
me
tal
and
Fab
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bev
Ele
ate
ctr
e ra
d
ica
ges
me
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tal
ach
Oth
pro
ine
e
d
r
u
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act
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and
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Ag
sup
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ric
p
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nm
ult
u re
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, fo
ser
res
vic
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es
and
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i
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n
No
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n-m
ng
anu
tot
fac
al
tur
i
ng
All
tot
ind
al
ust
rie
s to
tal

-600

(2) Number of employed persons

Forecast →Change2000-2020

1980

1990

2000

Manufacturing

1,357

1,489

1,248

1,016

856

-393

Non-manufacturing

4,877

5,308

5,778

6,062

5,974

196

1,040

1,104

1,201

1,383

1,276

74

338

360

402

437

489

88

1,040

1,445

1,885

2,291

2,575

690

(1) Total number employed

6,233

6,796

7,026

7,078

6,829

-196

(2) Persons employed (medium scenario)

5,866

6,427

6,661

6,560

6,289

-372

(3) Side job ratio (1)/(2)

1.06

1.06

1.05

1.05

1.05

6,888

6,603

Of which: wholesale and retail trade
Of which: transport and communications
Of which: service activities(4) Expected number of employable persons (2)×side job ratio (1.05)

2010(10,000 persons, %)2020(5) Expected supply-demand gap in labor (1) – (4)

190

226

(6) Future labor force participation rate (medium scenario)

59.4

57.7

(7) Supply-demand gap in labor after adjustment for potential labor force participation rate

-215Notes : 1. “Side job ratio” is assumed to remain at the level of 2000 (1.05) in 2010 and 2020.
2. “Supply-demand gap in labor after adjustment for potential labor force participation rate” is estimated on the basis of potential growthrate, which represents the sum of expected labor force participation rate (4) in 2010 and 2020 and the gap (4.9%) between thepotential labor force participation rate calculated in Appendix 1 (65.7% in 2003) and actual labor force participation rate (60.8%).

(3) Composition
Forecast →

(%)
100
80

Non-manufacturing excluding services

60

Services

40

Manufacturing
Construction

20

Agriculture, forestry, fishing & mining

01980
Sources :

1990

2000

2010

2020

(CY)

Cabinet Office, “SNA Input-Output Table” and “Annual Report on National Accounts.”

Development Bank of Japan Research Report/ No. 48

53

(Appendix 1) Expected Mobilization of Potential Labor Force in the Young,Female and Older Populations
Figure 3-28. Trends in Labor Force
Participation Rate

Figure 3-29. Actual and Potential Labor
Participation Rate

(%)

Male

(%)

70

100
90

60

80
50

70

40

60
50

30

40
30

20

20

10

10
0

(by age group)

0
80

82

84

86

88

90

92

94

96

98

00

02

15 20 25 30 35 40 45 50 55 60 65〜〜19 〜24 〜29 〜34 〜39 〜44 〜49 〜54 〜59 〜64
1980
1990
2003
Potential labor participation rate in 2003

(CY)
Male

FemaleOlder persons

Figure 3-30. Actual and Potential Labor
Participation Rate(%)

Figure 3-31. Wishing to Work by Reason for
Not Seeking a Job

FemaleFemale

(%)
30

100
90

25

80
70

20

60
50

15

40
10

30
20

5

10
0

0
15 20 25 30 35 40 45 50 55 60 65〜〜19 〜24 〜29 〜34 〜39 〜44 〜49 〜54 〜59 〜64

15
〜24

25
〜34

(by age group)
1980
1990
2003
Potential labor participation rate in 2003
Note :

Source : Ministry of Internal Affairs and Communications, “Labour Force Survey.”

54

Development Bank of Japan Research Report/ No. 48

45
〜54

55
65〜
〜64
(by age group)

OthersHousekeeping or childcare
No prospect of finding a suitable job

Potential labor force participation rate, calculated by age group, is defined as follows:
Labor force + persons not in labor force but wishing to work
×100
population of 15 years old or more35
〜44

(Appendix 2) Divergence on Preferred Type of Employment between Employers andUnemployed Persons
Figure 3-32. Unemployment Rate by Age
Male

(%)

14
12
10
8
6
4
2
0

Female

(%)
14
12
10
8
6
4
2
0

15 20 25 30 35 40 45 50 55 60 65〜〜19 〜24 〜29 〜34 〜39 〜44 〜49 〜54 〜59 〜64

15 20 25 30 35 40 45 50 55 60 65〜〜19 〜24 〜29 〜34 〜39 〜44 〜49 〜54 〜59 〜64
2003

1990

Figure 3-33. Type of Employment
Preferred by Unemployed Persons(as of 2003)

1980

Figure 3-34. Number of Employees byType of Employment(10,000 persons)

(%)
100

5000

50

80

4000

40

60

3000

30

40

2000

20

20

1000

10

0

0

0
15
〜24

25
〜34

35
〜44

45
〜54

55
65
〜
〜64
(by age group)

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

Regular employment (female)
Part-time worker, Arbeit (female)
Regular staff (male)
Part-time worker, Arbeit (male)
Source :(CY)Regular staff
Dispatched, contract, entrusted or other workers
Part-time worker, Arbeit
Male part-time worker ratio (right scale)
Female part-time worker ratio (right scale)

Ministry of Internal Affairs and Communications, “Labour Force Survey.”

Figure 3-35. Number of Employees by Industrial Sector and Type of Employment(as of 2003)
Male

FemaleRegular staff

Part-time or temporary workers

Other non- x
manufacturing x

Other non- x
manufacturing x

Wholesale and x
retail trade x

Services x

Manufacturing x

Construction x

Agriculture, forestry, xfishing and miningx

0

Wholesale and x
retail trade x

200Services x

400

Manufacturing x

600

Agriculture, forestry, xfishing and miningx

1200
1000
800
600
400
200
0

800

(10,000 persons)Construction x(10,000 persons)

Dispatched, contract, entrusted or other workers

Notes : 1. “Services” includes eating and drinking places, accommodations, medical/health care and welfare, education, learning support, compound
services and (other) services.
2. “Other non-manufacturing” includes electricity, gas, heat and water, information and communications, transport, finance andinsurance, real estate, government, and industries unable to classify.
Source : Ministry of Internal Affairs and Communications, “Labour Force Survey.”

Development Bank of Japan Research Report/ No. 48

55

(Appendix 3)
Increase in Part-time Employment in the Robust Service Sector,
Labor Movement Mostly Constrained within Industries
Figure 3-36. Net Hiring (entering - leaving) Rate
Total

General workers(%)

Part-time workers

(%)

(%)

1.0

1.0

2.5

0.5

0.5

2.0

0.0

0.0

1.5

-0.5

1.0

-1.0

0.5

-1.5

0.0

-2.0

-0.5

-0.5
-1.0
-1.5
-2.0

-1.0

-2.5

(CY)

-2.5

(CY)

-3.0
95

96

97

98

99

00

01

02

95

96

97

98

99

00

(CY)

-1.5

01

95

02

96

97

98

99

00

01

Construction

Manufacturing

Wholesale, retail, eating and drinking placesServices

Other non-manufacturing

Net hiring rate

Figure 3-37. Intra- and Inter-Industry Job Changers (Share)
(%)
18.0
16.0

2002

14.0
12.0
10.0

2000

8.0
6.0
4.0

1995

PrimarysectorConstruction

Manufacturing

Notes :

Services

Wholesale &retailOther non-manufacturing

Services

Wholesale & retail

Construction

Manufacturing

Other non-manufacturing

Services

Wholesale & retail

Construction

Manufacturing

Wholesale & retail

Other non-manufacturing

Services

Manufacturing

Construction

Other non-manufacturing

Wholesale & retailServices

Manufacturing

Construction

Other non-manufacturing

Services

Wholesale & retail

Construction

Manufacturing

Services

Wholesale & retail

Construction

Manufacturing

0.0

Other non-manufacturing

2.0

Other nonmanufacturing

1. “Wholesale & retail” includes eating and drinking places.
2. “Other non-manufacturing” includes electricity, gas, heat and water supply, transport and communications, finance and insurance,and real estate.
Source : Ministry of Health, Labour and Welfare, “Survey on Employment Trends.”

56

Development Bank of Japan Research Report/ No. 48

02

List of Back Numbers (Including JDB Research Report)
No. 48 Recent Trends in the Japanese Economy: Medium-term Outlook of Japanese Industrial Structure (thisissue)
No. 47 Survey on Planned Capital Spending for Fiscal Years 2003, 2004 and 2004 (Conducted in June 2004),
September 2004
No. 46 Recent Trends in the Japanese Economy: Impact of Rising International Commodity Prices on Corporate Input/Output Behavior, September 2004
No. 45 How Life Cycle Assessment (LCA) Can Enhance the Fight against Global Warming, August 2004
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, March 2004
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. 4

Current 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