Development Bank of Japan
Research Report
No. 19Recent Trends in the Japanese Economy:
The Japanese Economy under Deflation

August 2001

Economic and Industrial Research Department
Development Bank of Japan

Contents

Summary .............................................................................................................................ⅲ
I The Japanese Economy in an Adjustment Phase.......................................................... 1
1. Overview: Rapid Contraction of Production .......................................................................... 1
2. Shipments: Down on Previous Year, Inventories: Further Adjustment ............................. 3
3. Income: Stagnating, Consumption: Sluggish........................................................................... 5
4. Plant and Equipment Investment: Leading Indicator Implying Substantial
Slowdown ..................................................................................................................................... 9
5. Housing Investment: Decreasing ............................................................................................12
6. Public Investment: Decreasing ................................................................................................13
7. Exports: Decreasing, Imports: Slowed Growth....................................................................15
8. Weak Prospects for Overtime Hours and Job Offers..........................................................16
9. Short-term Interest: Moving Around Zero with Quantitative Easing, Consumer
Prices: Continuing to Decline .................................................................................................18

II The Japanese Economy under Deflation ................................................................... 21
1. Introduction ...............................................................................................................................21
2. Deflation and Structural Issues of the Japanese Economy.................................................21
3. Falling Prices Explained by both Supply and Demand Factors.........................................23
4. Increased Imports Contributing to Falling Prices................................................................25
5. Loan Repayment Burden Restricting Consumption Despite Stable Real Income..........28
6. Corporate Profits Secured by Reduced Personnel Cost Despite
Downtrend in Sales Prices .......................................................................................................32
7. Real Interest Rates Remain High, Corporate Debt Repayment Burden
Still Growing ..............................................................................................................................34
8. Financial Assets Increasing in Parallel with Liabilities while Real Assets Decrease........36
9. Increased Government Debt Burden and Mounting Concerns about the Future..........38
Analysts and writers:
Hajime Wada
Jun-ichi Nakamura
Koichi Ando
Wataru Miyanaga
Naoki Shinada

Overall supervision
Sections I-1, I-2, I-4, II-1, II-2, II-3, II-6 and II-7
Sections I-5, I-6, I-9, II-8 and II-9
Sections I-3, I-8, I-9, II-5 and II-9
Sections I-7, II-4 and II-9
Development Bank of Japan Research Report/ No. 19 i

Recent Trends in the Japanese Economy:
The Japanese Economy under Deflation
Summary
1. Following a mild recovery from a trough in April 1999, the Japanese economy has now
entered an adjustment phase, mainly due to a slowdown in the US economy and the rapid
deterioration of supply-and-demand conditions in areas related to information technology (IT).
Consumption has remained stagnant, reflecting the harsh employment and income environment,
while exports to Asia as well as the US have declined. Coupled with weak prospects for plant andequipment investment, which has led the recovery to date along with exports, it’s hard to find adriving force for the Japanese economy.
Personal consumption has remained sluggish and is expected to remain weak for the time
being: Management conditions are tough, and a rise in corporate profits has not led to any
discernable increase in household income. Furthermore, issues such as the budget deficit anddifficulties encountered by pension plans have fueled concerns about the future.
Plant and equipment investment has been increasing since late 1999. The growth has beenless robust than in the past, however, led solely by manufacturing related to information
technology. As production has already peaked mainly in IT-related industries and the leading
indicator of machinery orders has slowed down substantially, plant and equipment investment
will likely remain stable or even decline in fiscal 2001.
Housing investment decreased for the first time in two years as the effect of tax relief
measures for housing loans ended. Although there has been some progress in implementing the
supplementary budget (new development policy) adopted in the autumn of 2000, public
investment will probably continue to fall as efforts for budget reform gather momentum.
Exports turned down with the slowdown in the world economy, particularly the US
economy, in the second half of fiscal 2000. In contrast, imports are expected to remain firm due
to structural factors such as imports from Asia, although growth has slowed in line with domestic
demand.
The industrial inventory cycle points to an adjustment, particularly for producer goods(intermediate goods including semiconductors and liquid crystals), since January-March 2001. As
regards employment, overtime hours as well as job offers have fallen slightly mainly in the
manufacturing sector, which suggests a further rise in the unemployment rate.
In the financial sector, bank lending has declined while the money stock has continued torise, implying a preference for low risk investments including government bonds, whose yields
are now on the decline. Short-term interest rates were just above zero following the lifting ofquantitative controls by the Bank of Japan. As consumer prices continue to decline particularly
for industrial products, the easy monetary policy will be maintained for the time being.
2. As prices continued to decline since 1999 even during the economic recovery phase, theCabinet Office finally described the current economic situation as “deflation.” This reportanalyzes the background of deflation and its effects on the real economy, regarding deflation as aphenomenon that encompasses various structural problems/changes the Japanese economy faces
on both the demand side and the supply side.
Development Bank of Japan Research Report/ No. 19 iii

Deflationary factors on the supply side include, improved productivity through technologicalprogress (electric machinery, etc.), deregulation and increased entries into markets(communications, etc.), and the growth of low-priced imports (textile products, etc.). Data
analysis indicates, among others, that prices have declined for machines and appliances due tocost reduction through improved productivity and competition with imports, and that importprices for textile products have fallen due to productivity improvements and cost reductions withdirect investments from Japanese manufacturers.
On the demand side, deflation largely stems from balance sheet problems in all sectors
including household, business, finance and government. The continuous fall in prices that
resulted has created further balance sheet problems primarily through the increased debt burdenin real terms. In the household sector, consumer demand has been stagnant due to concerns
about retirement and pension benefits in the future, as companies come under pressure to
restructure, financial institutions are obliged to write off non-performing loans and thegovernment faces an ever-increasing debt burden. Also, the consequent decline in prices has led
to lower consumption among households with housing loans to repay. In the corporate sector,
analysis shows that the restriction on plant and equipment investment is largely attributable tohigh real interest rates, as the decline in output prices has already been taken into account.
Another cost of deflation is increased real-term repayment burden on existing loans.
In addition to falling prices, the decline in asset prices suppresses consumption through thenegative wealth effect, and may also restrain plant and equipment investment by reducing
collateral values.
Future policy measures should address structural reforms to increase potential supply as wellas create corresponding demand and employment opportunities. It is also essential to safeguard
against possible economic downturn.

iv Development Bank of Japan Research Report/ No. 19

I. The Japanese Economy in an Adjustment Phase
1. Overview: Rapid Contraction of Production
Following a mild recovery from a trough in April 1999, the Japanese economy has now enteredan adjustment phase, mainly due to a slowdown in the US economy and the rapid deteriorationof supply-and-demand conditions in areas related to information technology (IT). Consumption
has remained stagnant, reflecting the harsh employment and income environment, while exports
to Asia as well as the US have declined. Coupled with weak prospects for plant and equipment
investment, which has led the recovery to date along with exports, there has been growing
concern about the virtual collapse of the Japanese economy.
Real GDP for fiscal 2000 increased for two years running, up 0.9% from the previous year,
but the growth rate did not reach the level of fiscal 1999 (1.4%). On a quarterly basis, GDP grewfor nine consecutive periods from January-March 1999 (change on the previous year for the
purpose of this section), only to level off in January-March 2001 largely due to the substantial
slowdown in exports (Figure 1-1).
Figure 1-1. Trends in Real GDP (Year-on-year change by component)
(%)
8

91/2

7

93/10

97/3

99/4

Year-on-year change in GDP

6
5
4

Exports

3
2
1

Government consumption
Plant and equipment investment
Housing investment
Consumption
Public investment

0-1

Imports (reverse sign)-2
Inventory investment

-3
-4
90

91

92

93

94

95

96

97

Note: 1995 as base year. Government consumption includes the contribution of public inventories.
Source: Cabinet Office, “Annual Report on National Accounts.”

98

99

00

01

(CY quarterly basis)

Although private final consumption expenditure showed signs of recovery in some demand
items including those related to durable goods, it remained sluggish overall. Its year-on-year
growth in fiscal 2000 hovered around zero and stood at –0.5% in January-March 2001 despite theeleventh-hour demand before the Household Electric Appliance Recycling Law went into effect.
Consequently, consumption for fiscal 2000 as a whole declined for the first time in three years,
down 0.2% from the previous year. Consumption has been sluggish because of toughmanagement conditions, which has not allowed any increase in household income through wage
rises reflecting the improvement in corporate profits, as well as growing concerns about the
future due mainly to budget deficits and difficulties experienced by pension plans. With suchsituations being unchanged, consumption is expected to remain sluggish for the time being.
Plant and equipment investment by private firms has increased for six consecutive quarters
since October-December 1999, thanks to strong production in IT-related industries from fiscal
Development Bank of Japan Research Report/ No. 19 1

1999 to the first half of fiscal 2000. As a result, investment increased for the first time in three
years for fiscal 2000 overall, up 4.5% from the previous year. On a quarterly basis, however, thegrowth has never reached double figures, reflecting the relative weakness of recovery, as the
expansion has been almost solely led by IT-related industries. Investment has been cautious
compared with the improvement in profits. Production has already peaked mainly in IT-relatedindustries and the leading indicator of machinery orders predicts a substantial slowdown. Thus, it
is likely that plant and equipment investment will begin to show signs of decline by mid-fiscal
2001.
Housing investment for fiscal 2000 declined for the first time in two years (down 1.9%) as
the inflating effect of tax relief measures for housing loans has subsided and housing starts forowned houses fell. Housing starts as a whole are expected to remain weak, decreasing for owneroccupied houses and leveling off for condominiums.
With little recovery in private demand and financial difficulties experienced by the central
and local governments, public investment has declined for six consecutive quarters since
October-December 1999, resulting in a sizable drop of 6.1% for the whole fiscal 2000. Looking
ahead, expected progress in the New Development Policy (total cost of ¥11 trillion) adopted in
October 2000 will not be sufficient to reverse the downtrend in public investment, as budget
reform efforts gather momentum.
Backed by the strong European and US economy as well as the rapid recovery of the Asian
economy, exports rose in July-September 1999 and then peaked between January-March andJuly-September 2000, recording double-digit increases for three quarters running to lead theoverall growth of GDP. But as the world economy lost steam, particularly in the US, whichbecame apparent in the second half of fiscal 2000, exports slowed to a growth of 1.4% on theprevious year in January-March 2001, recording the first decline in eight quarters from theprevious period in seasonally-adjusted terms.
Imports have been increasing steadily mainly from Asia, despite a slight slowdown in thesecond half of fiscal 2000. Consequently, the contribution of net exports in January-March 2001
declined for the first time in five quarters. Exports are expected to continue to decline due toincreased uncertainties about the timing and speed of recovery in the US economy, while imports
Figure 1-2. Trend of Production Indicators (Seasonally adjusted)
120

91/2

93/10

99/4

97/3

Industrial production index(1995=100, weight 22.4%)

110

100

Tertiary industry activity index(1995=100, weight 59.5%)

90Construction activity index(1995=100, weight 8.1%)(CY quarterly basis)

80
90

Note:
Sources:

2

91

92

93

94

95

96

97

98

99

00

Industrial production index for 2Q/01 represents forecast based on actual data for April and the Survey on the
Forecast of Manufacture Production.
Various indices reported by the Ministry of Economy, Trade and Industry.

Development Bank of Japan Research Report/ No. 19

01will remain firm due to structural factors. On balance, net exports are expected to make anegative contribution to GDP.
Judging from the conditions described above, the government forecast of real GDP for
fiscal 2001 (up 1.7%, adopted by the Cabinet Meeting on January 31, 2001) will almost certainly
be revised downward, possibly to a negative figure.
Figure 1-2 shows the trend of major production indicators including industrial production
index, tertiary industry activity index and construction activity index.
The industry activity index in January-March 2001 fell for the first time in seven quarters due
to inventory adjustment and the decline in demand related to electric machinery, which had led
the previous recovery from April-June 1999. An estimate using the results of the Forecast Survey
on Manufacturing Production clearly indicates a substantial drop for the following April-June
period, thus confirming the rapid decline in industrial production.
The tertiary industry activity index has been rising as a whole on the back of growth intelecommunications and firmness in the heavy-weighted service sector. Construction activity hasremained weak since the latter half of fiscal 1999, when recovery led by a surge in public works
came to a halt.
2. Shipments: Down on Previous Year, Inventories: Further Adjustment
In a graph with the year-on-year growth of inventories on the horizontal axis and that ofshipments on the vertical axis, the level of inventories is empirically known to move in clockwise
circles. This confirms the existence of a so-called inventory cycle; although producers basically try
to adjust their production to shipment volume, the time lag between the recognition of any
change in shipment growth in parallel with the economic cycle and the subsequent adjustment of
production volume results in changes in the inventory level.
For instance, when shipments start to recover, the level of production remains low for sometime, resulting in an unintentional reduction in inventories by producers (recovery phase in theconceptual chart on page 4). As shipments continue to increase, producers intentionally build up
inventories by increasing production until they recover to a reasonable level (intentional buildup
phase). Subsequently, the growth of shipments begins to slow as the economy peaks, while a highlevel of production is still maintained by producers. As a result, the growth of inventories exceedsthat of shipments (crossing the 45-degree line in the first quadrant from upper left to lower right).
This means that inventories, against the will of producers, continue to increase above thereasonable level (unintended accumulation phase). Further recession, hence further decrease in
shipments, will lead producers to cut back production at a pace faster than the decline inshipments until inventories fall to a reasonable level (inventory adjustment phase). This creates
the inventory cycle consisting of the above four phases.
The inventory cycle in January-March 2001 shows that industrial shipments as a wholedecreased for the first time in seven quarters while inventories continued to increase mainly for
producer goods. Thus, the cycle is already in the adjustment stage, and inventories have been
rapidly adjusted since April (Figure 1-3).
By type of goods, shipments have increased only for capital goods (excluding transport
equipment), but the double-digit growth has slowed as domestic plant and equipment investment
has leveled off. Consequently, the inventories of capital goods have started to increase slightly(Figure 1-4). The shipments of construction materials have been falling, as public investment has
been reduced and private construction investment has remained weak except for some items
including factories (Figure 1-5). As regards consumer goods, shipments of non-durable goods
continued to decline while shipments of durables, which had been increased by the contributionof domestic demand, decreased for the first time in seven quarters (Figure 1-6). As for producer
Development Bank of Japan Research Report/ No. 19 3

goods, shipments turned downward mainly for IT-related products such as semiconductor
integrated circuits, while the growth of inventories accelerated, raising concerns about aprolonged inventory adjustment (Figure 1-7).
In the manufacturing and mining sector as a whole, the current inventory cycle, which hasentered the adjustment stage, is characterized by a slow accumulation of inventories while
shipments have been decreasing at a pace similar to the adjustment stage in the previous cycle.
Thus, except for producer goods, production is expected to pick up earlier if only final demandbottoms out, future developments will depend largely on factors such as the recovery of the US
economy and the trend of domestic consumption.

Change in shipments on previous
year (%)

10

Change in shipments on previous
year (%)

Figure 1-3. Inventory Cycle (Mining and manufacturing sector)
00/4-6

97/1-3
99/10-125

00/1-3
99/7-9 00/7-900/10-120

99/4-6
99/1-3

01/1-301/4(4.8,△5.3)-598/10-12

98/7-9-10-10

98/1-3

98/4-6-50

5Concept
45-degree

Buildup phase

Unintended
accumulationh

Recoveryphase

AdjustmenthChange in inventories on previous year (%)

10

Change in inventories on previous year (%)

Figure 1-4. Inventory Cycle of Capital
Goods (Excluding transport equipment)

5
97/1-310

00/4-600/7-900/1-3

5

01/1-3
99/10-12001/4(1.2,0.9)

99/7-998/1-3-5
99/4-6-10
99/1-3

-15
-20

-15

98/4-6

98/10-12-10

98/7-9
-5

0

5

10

15

Change in inventories on previous year (%)

4

97/1-300/10-12

Change in shipments on previous
year (%)

15

Change in shipments on previous
year (%)

Figure 1-5. Inventory Cycle ofConstruction Materials

Development Bank of Japan Research Report/ No. 19

00/7-901/4△1.6, 0.5

00/4-6000/1-300/10-12
99/10-12

99/1-3-5

99/4-6

01/1-3

99/7-998/10-12-10

98/7-998/1-3

98/4-6

-15
-10

-5

0

5

10

Change in inventories on previous year (%)

Figure 1-6. Inventory Cycle of Consumer
Goods

5
0

99/7-999/4-6
99/1-3-10-15

Source:98/10-12
98/7-998/4-6

99/10-1210

99/10-1200/1-300/4-600/7-900/10-12

01/1-3-5

15

97/1-3

Change in shipments on previous year(%)

Change in shipments on previous year(%)

10

Figure 1-7. Inventory Cycle of Producer
Goods

01/4
（△3.4,△3.6）

98/1-3

-5

0

5

10

00/7-900/10-125
99/4-6

97/1-30

01/1-3

99/1-3
98/1-3-5
98/10-12-10

Change in inventories on previous year (%)

00/4-6

99/7-9-10-1000/1-3-5

98/7-998/4-601/4（11.7,△9.0）

0
5
10
15
Change in inventories on previous year (%)

Ministry of Economy, Trade and Industry, “Industrial Index.”

3. Income: Stagnating, Consumption: Sluggish
According to the Monthly Labor Survey, after the increase for the first three quarters of 2000,
total wages and salaries per person (Figure 1-8) stay around a year ago level, showing signs ofstagnating. By component, the growth of overtime hours and pay since 1999 began to slow, whileregular wages and salaries actually fell in the most recent period. Although bonuses and special
earnings increased in January-March 2001, data on bonuses alone (Figure 1-9) indicate that the2000 year-end bonus declined 3.1%, following the first increase in three years recorded in thesummer. The wage increase after the spring labor campaign, which remained at the record-low
level for three consecutive years, is expected to be even lower in fiscal 2001. Thus, the income
environment is likely to deteriorate further in the coming months.
Figure 1-10 adjusts the consumption expenditure appearing in the Family Income andExpenditure Survey (households with two or more members excluding those engaged inagriculture, forestry or fisheries) to identify the trend of household consumption expenditure up
to the most recent period.1 Consumption expenditure has been stagnant in both nominal andreal terms, increasing only slightly in the economic recovery phase since April-June 1999.
Although real consumption has remained below nominal consumption since the consumption
tax rate was raised in 1999, the former has been growing faster than the latter due to falling prices
in recent years, underlining the continued sluggishness of nominal consumption. Still more, theconsumption expenditure of single-member households, which are not included in the said data,rose 1.0% and 4.6% from the previous year in fiscal 1998 and 1999 respectively, but declined
6.8% in fiscal 2000, due to a huge drop in non-elderly households. It is difficult to make a
judgment solely from those figures, as they are far more volatile than the data for householdswith two or more members. Nevertheless, the consumption of single-member households, which
accounts for a quarter of total households and are considered in provisional GDP data, is much
weaker than previously thought.

1Here, consumption items without any identified purposes (pocket money, gifts, other social expenses and remittances) areexcluded as well as automobiles, which fluctuate widely. Data were converted into Macro-based consumption expenditure andcount out the influence of the downtrend in the number of household members. Finally, real values calculated for each type of
goods/services were seasonally adjusted according to the Census Bureau X-11 program. Conceptually, the data does notcorrespond to those of GDP which incorporates single-member households, agricultural forestry and fishery households,
imputed rent for owned houses, automobile purchases, etc. The figures are indexed on 1995 average (=100).
Development Bank of Japan Research Report/ No. 19 5

Figure 1-11 breaks down the growth of real consumer spending in workers’ households ofthe Family Income and Expenditure Survey into three factors: income (pre-tax income including
regular wages and salaries, overtime pay and bonus), tax and charges (income tax, inhabitant tax,
social insurance premium, etc.) and consumption propensity (ratio of consumption to disposable
income). Although real consumer spending has been recovering slightly since last year, theincome factor has made a negative contribution for eight consecutive quarters since April-June
1999. Consumption propensity, which offsets the drop in income, has risen since 1999 to 73.2%(seasonally adjusted figure) in January-March 2001, the highest in four years. This trend can level
off or even reverse in the coming periods.
Figure 1-8. Trends in Wages and Salaries
per Person (Trend of year-on-year change
by component)

Figure 1-9. Spring Wage Increase andChange in Bonuses on Previous Year

(％)
4

4

3

3

2

2

1

1

0

0

-1

-1

(％)

-2

-2

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

-3
-4
95

96

97

98

-3

Summer bonus
Year-end bonus
Spring wage increase
Aggregate by Japan Federation of Employers’ Associations

-4

99

00

01

-5
95

Note:
Source:6

Firms employing five or more workers.
Ministry of Health, Labor and Welfare,“Monthly Labor Survey.”

Development Bank of Japan Research Report/ No. 19

96

97

98

99

00

01

Notes:
1. Summer bonus and year-end bonus include wages andsalaries paid as such in July-August and NovemberJanuary respectively in firms employing five or moreworkers.
2. Spring wage increase covers listed companies withtrade unions employing 1,000 or more workers andcapitalized at ¥2 billion or over.
3. Aggregate by Japan Federation of Employers’
Associations covers 209 major companies that haveconcluded pay raise agreements.
Sources:
Ministry of Health, Labor and Welfare,“Monthly Labor Survey;” Japan Federation of
Employers Associations, etc.

Figure 1-10. Consumption Trend according
to Family Income and Expenditure
Survey (Seasonally adjusted)
110(index, 1995=100)(％)
6Real consumption expenditure
Nominal consumption expenditure

108

Figure 1-11. Real Consumption(Change on previous year by component)

4

106

2

104

0

102

-2

100

-4

98

-6

96

-8

(CY quarterly basis)
95

94
92
(CY quarterly basis)
90
95

Note:

Sources:

96

97

98

99

00

96

97

98

99

00

01

Consumption propensity factor
Tax and charges factor
Income factor
Real consumption
01

Consumption expenditure are of all households
covered by the Family Income and Expenditure
Survey excluding pocket money, gifts, other social
expenses, remittances and automobile purchases
and is adjusted for the decrease in household
members and population growth. Conversion into
real terms was made separately for durable goods,
semi-durable goods, non-durable goods andservices, using the consumer price index(excluding imputed rent and automobiles). Finally,seasonal adjustment was made with X-11.
Ministry of Public Management, Home Affairs,
Posts and Telecommunications, “Family Income
and Expenditure Survey,” “Consumer Price
Index” and “Population Estimation.”

Notes:
1. Conversion into real terms was made for total figures by
CPI excluding imputed rent.
2. Factor resolution was made as follows (all in real terms):
ΔC = α･ΔY – α･ΔT + Δα･(Y – T)(factor)(income)(tax and charges) (consumption propensity)

C: consumer spending, Y: income, T: tax and charges,
α: consumption propensity
Sources:
Ministry of Public Management, Home Affairs,
Posts and Telecommunications, “Family Income
and Expenditure Survey” (workers’ households)
and “Consumer Price Index.”

Among the supply indicators related to consumption, the retail sales index (seasonallyadjusted, 1995 average=100; Figure 1-12), has been improving slightly since last year following amild downtrend from 1997 partly due to falling prices. Although declines continued in textiles,
clothes, personal goods, foods and beverages, these are more than offset by the recovery in home
appliances and automobiles after bottoming out in October-December 1999.
The number of new passenger car registrations (Figure 1-13) has also remained firm since
the beginning of 2000. Although the registrations of light and medium-sized automobiles havestarted to drop, sales of small-sized vehicles have been buoyant thanks to the successive
introduction of new models. In total, sales of passenger cars amounted to 4.257 thousand
vehicles (1.7% increase from the previous year), a second consecutive year of increase, and the
makers also expects a slight increase for fiscal 2001.
Along with automobiles, buoyant sales were observed for household durable goods due tothe last minute demand prior to implementation of the Recycling Law in April 2001. Figure 1-14
makes a similar adjustment to Figure 1-10 to identify the change on the previous period bycomponent. Spending on the four products covered by the Recycling Law (refrigerators, washingmachines, air-conditioners and TVs) increased 69% from the previous year level in JanuaryDevelopment Bank of Japan Research Report/ No. 19 7

March 2001, raising overall consumer spending by 0.8%. The effect was greater than JanuaryMarch 1997, just before raising the consumption tax rate. At that time, the subsequent
reactionary drop was substantial, as the 5.4% increase in private final consumer spending
recorded in January-March 1997 was followed by a 6.3% drop (change from the previous period
in seasonally adjusted real terms) in the April-June period. In the present case, however, both the
Family Income and Expenditure Survey (after adjustment) and provisional GDP data indicatethat sales did not grow faster than in the previous two quarters. Unlike the consumption tax hike,which affected a wide range of goods and services, the Recycling Law is only applicable to thefour products that only accounted for 0.9% of consumer spending on average between 1995 and1999. Thus, any repercussion from April onward is expected to be limited.
Figure 1-12. Retail Sales Index(Seasonally adjusted)

Figure 1-13. New Car Registrations(Seasonally adjusted)(annual rate, 10,000 vehicles)

400

120
（ 92/ 1Q =100）

97/1Q

115

380

Retail ind u stry
total

110

Hou sehold
m achines/appliances
and au tom obiles

105

360
340

100
95

320

Textiles, clothing, personal
item s, food s and beverages

90

00/2Q

300

85
(CY quarterly basis)

80
95

Note:
Source:

96

97

98

99

00

(CY quarterly basis)

280
01

Retail sales index except for total represents theaverage of published seasonally adjusted figures
weighted by the sales of each industry.
Ministry of Economy, Trade and Industry,“Report of the Current Survey of Commerce.”

99/4Q

98/1Q

95
Source:

96

97

98

99

00

01

Source: Cabinet Office, “Indexes of BusinessConditions.”

Although some positive factors have been observed particularly for durable goods, such as
relatively robust car sales and a surge in demand just before the Recycling Law went into effect,consumption is expected to flatten or weaken in the coming periods. As shown in Figure 1-14,
consumer spending on the products not covered by the Recycling Law declined in January-March
2001, just before it came into force. One prospect is that, consumption may stay almost flat
overall, as spending on such products recovers from April. Alternatively, if consumption of those
products does not recover, it implies that consumer spending in January-March was supported
only by the last minute demand and a underlying trend has already started to stall. The monthly
Family Income and Expenditure Survey for April indicates a substantial drop in consumption
expenditure for the products not covered by the Recycling Law, and supports the latter view.2
2

The April survey indicates a substantial decline on the previous year especially in automobiles, tuition and funerals due tosample factors. Thus, 5.2% plunge should be treated with caution.

8

Development Bank of Japan Research Report/ No. 19

Figure 1-15 shows the consumer outlook for the coming six months according to the Survey on
Consumption Trends. The consumer confidence index (simple average of five survey items)
continued to improve slightly for five quarters from July-September 1999 but then fell since
October-December 2000 due mainly to deteriorating employment conditions, with all survey
items except prices declining from the previous quarter in the most recent period. Overall,
consumption is likely to weaken, influenced by worsening income and employment conditions.
Figure 1-14. Impact of Recycling Law on
Real Consumption

Figure 1-15. Quarterly Change inConsumer Confidence Index (Seasonallyadjusted)

( ％)
6
(％)
20

4

15

2

10

0

5
0

-2

-5

-4

-10

(CY quarterly basis)
95

96

97

98

99

00

01

4 products to be recycled
Other durable goods
OthersConsumer spending

Notes:

Sources:(CY quarterly basis)

-15

-6

The same adjustments were made as in Figure 110.
The 4 products to be recycled include
refrigerators, washing machines, air-conditioners
and TVs.
Ministry of Public Management, Home Affairs,
Posts and Telecommunications, “Family Income
and Expenditure Survey,” and “Consumer Price
Index.”

95
96
97
98
Employment
Willingness to buy Durable goods
PricesIncome growth
Overall livelihood
Consumer confidence index

Notes:

Source:

99

00

01

1. Consumer confidence index is based onquestionnaire surveys for the coming six
months.
2. Figures for individual components wereredistributed from seasonally adjusted data.
Cabinet Office, “Consumer Confidence Survey.”

4. Plant and Equipment Investment: Leading Indicator Implying Substantial Slowdown
Plant and equipment investment by industry according to the Statistical Survey of Incorporated
Enterprises indicates that spending in the manufacturing sector rose on the previous year in
April-June 2000. Since then, it has recovered rapidly led by electric machinery, recording a 22.6%
increase in January-March 2001, the highest growth since April-June 1990 (Figure 1-16). In the
non-manufacturing sector, on the other hand, plant and equipment investment rose earlier thanin manufacturing in October-December 1999. The recovery did not last long, however, with thegrowth rate hovering around zero in fiscal 2000. In January-March 2001, the completion of retailinvestment in new stores prior to enforcement of the Law on the Location of Large-scale RetailStores and reactionary drop from the previous year in some services including hotels and inns
resulted in a 5.8% decline in non-manufacturing plant and equipment investment as a whole, thus
leading to the slowdown in plant and equipment investment on a GDP basis.
Development Bank of Japan Research Report/ No. 19 9

Return on investment (operating profit-tangible asset ratio – average interest rate on newloans: see Note of Figure 1-16), which empirically has a significant correlation with plant andequipment investment, continued to improve in the manufacturing sector until OctoberDecember 2000, exceeding a level equivalent to the previous peak, only to decline slightly inJanuary-March 2001. In the non-manufacturing sector, return on investment weakened
somewhat, though with fluctuations after a continued improvement until January-March 2000,
when it exceeded the previous peak.
In the current recovery phase, manufacturers initially took a cautious attitude toward plantand equipment investment despite the recovery in return on investment. In fiscal 2000, however,plant and equipment investment grew faster than return on investment. As return on investment
and production already appear to be leveling off, some over-investment may have occurred in ITrelated industries, thus raising concerns about a possible reaction in the coming periods. In nonmanufacturing, plant and equipment investment has constantly remained weaker than return on
investment, which may be attributable to two factors. First, return on investment improved
mainly due to the reduction of fixed costs. Second, investment continued to be curbed inindustries under heavy pressure to cut costs due to deregulation.
Figure 1-16. Plant and Equipment Investment and Return on Investment (Corporationsof all sizes)
Manufacturing
(％)

91/2

93/10

97/3

Non-manufacturing

99/4

(％)

(％)

15

30

30
20

91/2

93/10

97/3

99/4

(％)
10.0

20

7.5

10

5.0

0

2.5

-10

0.0

-20

-2.5

10
10
0

5

-10
0
-20
(CY quarterly basis)

-30

-5

90 91 92 93 94 95 96 97 98 99 00 01(CY quarterly basis)-30

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

Change on previous year in plant and equipment investment
Return on investment (right scale)Notes:

Sources:

1. Return on investment = operating profit-tangible asset ratio – average lending rate of banks (new loans, total),
where operating profit-tangible asset ratio = operating profit/(tangible fixed assets + inventories).
2. No adjustments are made for changes in the accounting rule on business tax (ministerial order revised in
December 1998).
Ministry of Finance, “Quarterly Report of Statistical Survey of Incorporated Enterprises,” etc.

10 Development Bank of Japan Research Report/ No. 19-5.0

Machinery orders (private demand excluding ships and electricity), which usually lead plantand equipment investment by approximately two quarters, continued to increase by double digits
from the previous year in both manufacturing and non-manufacturing, particularly from electricmachinery and telecommunications respectively, but then slowed down substantially in JanuaryMarch 2001 (Figure 1-17). As regards the manufacturing sector, in particular, machinery orders
from the electric machinery industry, which had played a leading role, suddenly dropped from theprevious year, due to deteriorating conditions in the IT market and contract cancellations.3
According to an estimate by the Cabinet Office, machinery orders will decline for the whole
manufacturing sector in April-June 2001. In the non-manufacturing sector, orders received forconstruction works (private non-housing), a leading indicator for the heavy-weighted
construction investment, continued to stagnate, although machinery orders were stronger than in
the manufacturing sector. The trend of the leading indicator implies that plant and equipment
investment is likely to remain weak or even decline in fiscal 2001.
Figure 1-17. Orders Received for Machinery (Trend of year-on-year change by industry)
35(％)

Manufacturing

25
15
5
-5
-15
(CY quarterly basis)

-25
-35
90
(％)

91
92
Electric machinery
Iron & steel

93

94
95
96
97
98
General machinery
Automobiles
OthersManufacturingNon-manufacturing

9900
Chemicals

01

35
25
15
5
-5
-15
-25

(CY quarterly basis)

-35
90

Note:
Source:3

91
92
Telecommunications
Real estate

93

94
95
Finance/insurance
Others96

97
98
Wholesale/retailNon-manufacturing

9900Construction

01

Cabinet Office estimate for 2Q/01.
Cabinet Office, “Orders Received for Machinery.”In the Machinery orders statistics, any cancellation of contracts is not made retroactive to the time of placing orders but is
subtracted from the value of orders at the time of cancellation.
Development Bank of Japan Research Report/ No. 19 11

5. Housing Investment: Decreasing
After dipping below 1.2 million units in 1998, housing starts (seasonally adjusted annual rate)
slightly recovered in 1999 thanks to the introduction of tax relief measures for housing loans andthe effect of low interest rates and have since stayed around 1.2 million units (Figure 1-18). They
have now exceeded the 1.2 million mark for two consecutive years, amounting to 1.226 millionand 1.213 million units for fiscal 1999 and 2000 respectively. However, housing starts have been
decreasing lately, falling below 1.2 million units to 1.182 million units in January-March 2001.
Figure 1-19 shows the contribution to year-on-year growth by type of housing. The recovery
that started in January-March 1999 was initially led by owner-occupied houses, which were
followed by condominiums from the latter half of 1999. Following some fluctuations in 2000,
recent developments point to stabilization for condominiums and decline for owner-occupied
houses, following eleventh-hour demand to benefit from tax relief.
The construction of owner-occupied houses fell in fiscal 2000, as the deadline of tax relief
measures for housing loans was extended and the standard rate of the Government Housing
Loan Corporation remained stable at around 2.8% (Figure 1-20). Within the fiscal year, theconstruction of owner-occupied houses increased temporarily in July-September, but thendeclined steadily. This is largely attributable to the surge in demand before the deadline to benefit
from preferential housing tax relief measures, and its subsequent withdrawal.
The standard interest rate of the Government Housing Loan Corporation started to decline
in late 2000 and stood at 2.45% as of April 2001. However, the number of applications for the
Corporation’s housing purchase loans, a leading indicator of owner-occupied houses
construction, has been falling, dropping 42.1% for the second invitation in 2000, followed bydeclines of 4.5% and 11.5% for the third and fourth invitations respectively (Figure 1-21).
Figure 1-18. Trend of Housing Starts

Figure 1-19. Housing Starts (Trend of
year-on-year change by component)(Seasonally adjusted annual rate, in
1,000 units)(Change on previous year, %)

2,000

20
15

1,800

10
5

1,600

0
-5

1,400

-10

1,200

-15
-20

1,000
(CY quarterly basis)(CY quarterly basis)

-25

800

95

Ministry of Land, Infrastructure and Transport,“Monthly of Construction Statics”

12 Development Bank of Japan Research Report/ No. 19

97

98

Owner-occupied houses
Housing for rent
Total

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

Source:96

Note:

Same as in Figure 1-18.

9900

Housing for saleCompany houses

01

Figure 1-20. Trend of Housing Loan Interest Rates（Unit：％）
00/1

2

3

4

5

6

The Government Housing
Loan Corporation

2.80

2.75

2.80

2.85

2.80

2.75

City banks variable rate

2.375

City banks fixed rate (5 years)

2.60

City banks fixed rate (10 years)

3.50

Notes:

7

8

9

10

2.80

2.85

11

12

01/1

2.80

2

3

4

5

6

2.70

2.55

2.45

2.60

2.55

2.5
2.75
3.40

3.55

2.65
3.50

2.75

2.90

3.45

3.60

3.65

2.375
2.80

2.75

2.70

2.60

2.50

2.60

2.55

3.55

3.50

3.45

3.35

3.20

3.45

3.35

1. Interest rate of the Government Housing Loan Corporation represents the standard rate (applicable to “certain
housing of good quality” for the initial 10 years).
2. The rate represents that at the end of the month.

The construction of condominiums was buoyant until July-September 2000, offsetting theslump in owner-occupied houses, but its growth slowed in January-March 2001. Although thecontract rate for condominiums in the Tokyo metropolitan area has stayed firm since 1999 ataround 80%, completed inventories have been increasing slightly (Figure 1-22). Due to a small
glut on the supply side, the construction of owner-occupied houses declined for the fourthconsecutive year in fiscal 2000, albeit at a slower pace (down 1.8%).
Figure 1-21. Housing Loan Applications
for Owner-occupied Houses

Application
deadline
FY 1998

FY 1999

FY 2000
FY 2001

Note:
Source:

1
2
3
4
1
2
3
4
1
2
3
4
1

6/5
9/30
12/25
3/26
6/18
10/29
1/14
3/10
6/30
9/22
12/22
3/23
5/28

Application
period(days)
23
31
37
48
36
67
61
33
49
34
38
43
23

Number of Change on
previous
applications
year (%)(1,000)
62
13.3
67
28.8
70
49.9
101
75.1
62
0.0
88
32.6
37
-47.3
38
-62.5
65
4.3
51
-42.1
35
-4.5
33
-11.5
28
N.A.

Standard
rate (%)
2.75
2.55
2.00
2.20
2.40
2.60
2.80
2.75
2.75
2.75
2.80
2.55
2.45

Simple comparison with the previous year is notpossible for fiscal 2001 as the number ofinvitations was changed from four to six.
The Government Housing Loan Corporation,“Monthly Report on Housing Loans.”

Figure 1-22. Contract Rate andCompleted Inventories of Condominiums(Tokyo metropolitan area)(Units)
14,000100%

12,00090%

10,000

80%

8,000

70%

6,000

60%

4,000
2,000

(CY quarterly basis)

50%

0
95

Note:

Source:

96
97
98
99
00
01
Inventories (right scale)Contract rate
Contract rate represents the quarterly average
ratio of units sold in the month to units
marketed in the month. Completed inventories
are measured at the end of each quarter.
Real Estate Economic Institute Co., Ltd. “Trendof Condominium Market in Tokyo Metropolitan
Area.”

6. Public Investment: Decreasing
Public investment (public capital formation, seasonally adjusted) started to rise in OctoberDecember 1998 thanks to the economic stimulus package of April 1998 (totaling over ¥16
trillion) and the Emergency Economic Package of November 1998 (¥23.9 trillion), increasing toover 8% of GDP in the first and second quarters of 1999 (Figure 1-23).
However, public investment declined to under 7% of GDP in July-September and OctoberDecember 2000, after a partial recovery in April-June 2000 due to the economic stimulus
measures of November 1999 (¥18 trillion). The ratio stayed at 7% in January-March 2001.
Although the New Development Policy of October 2000 (¥11 trillion) will provide some support,
Development Bank of Japan Research Report/ No. 19 13

public investment is expected to continue to fall, as the financial difficulties of local governmentsin particular are likely to affect implementation of the policy.
The contract value of public works, the leading indicator, recorded an increase of 11.7% in
fiscal 1998 thanks to the economic measures. However, it fell in fiscal 1999, particularly reflecting
financial difficulties of local governments, resulting in a 9.1% drop for the year (Figure 1-24).
Despite the effects of the economic stimulus package of November 1999 (totaling some ¥18
trillion), the contract value continued to slide from the previous year in fiscal 2000, resulting in adrop of 12.9% for the year. Although the New Development Policy (totaling some ¥11 trillion)
should have some effect, the decline is expected to continue for some time.
Figure 1-23. Trend of Public Investment(¥ trillion, nominal figures)

（％）
10.0

50
Sep. 1993: Emergency economic
measures (about ¥6 trillion)

45

Sep. 1995: Temporary economic
measures (¥14.22 trillion)

Nov. 1999: Economic stimulus
measures (¥18 trillion)

Nov. 1998: Emergency
economic measures(¥23.9 trillion)

Apr. 1993: Integrated
economic measures(about ¥13.2 trillion)

9.5
9.0
8.5

40

8.0
35

7.5

30

Feb. 1994: Economic stimulus
package (about ¥15.25 trillion)

25

7.0

Apr. 1995: Emergency economic
measures against the yen appreciation(about ¥4.62 trillion)

6.5
Oct. 2000: New development
policy (¥11 trillion)

Aug. 1992: Economic stimulus
package (about ¥10.7 trillion)

Apr. 1998: Economic stimulus
package (over ¥16 trillion)

20
91

92

Note:
Source:

93

94

95

96

97

Data represent seasonally adjusted annual rate.
Cabinet Office, “Annual Report on National
Accounts.”

98

6.0
5.5

(CY quarterly basis)

99

00

01

Public fixed capital formation
As % of GDP (right scale)Figure 1-24. Trend of Contract Value for Public Works (Change on previous year)
（％）
25
20
15
10
5
0
-5
-10
-15
-20
91

92

93

94

95

96

97

98

99

00
(FY)

Source:Central

Local

Others

Total

4-6
1999

7-9

10-12

1-3
2000

4-6

Surety Association for Construction Companies, “Public Works Prepayment Surety Statistics.”

14 Development Bank of Japan Research Report/ No. 19

7-9

10-12

1-3
2001

5.0

7. Exports: Decreasing, Imports: Slowed Growth
Figure 1-25 shows the trend of the real effective exchange rate of major currencies. The yen
remained almost flat throughout 2000, but depreciated substantially in January-March 2001, while
the US dollar continues to appreciate slowly.
Figure 1-26 shows the trend of export and import volumes in terms of seasonally adjusted
monthly index. The figure shows that exports have been declining since the second half of lastyear as economic growth slowed down overseas, particularly in the US. Meanwhile, imports
increased as the domestic economy gradually recovered throughout 2000, but slowed in 2001 andhas already leveled off on a monthly basis.
Figure 1-25. Trend of Real Effective
Exchange Rate (1990=100)

Figure 1-26. Export and Import Volume
Indices (1995=100)

130

130

Japan
Germany

125
115
110
105
100
95
90

ⅠⅡ ⅢⅣⅠⅡⅢ ⅣⅠⅡⅢ ⅣⅠⅡⅢⅣ Ⅰ
97

Note:

Source:98

99

ExportImport125
Currency appreciation

120

US

00

120
115
110
105
100
95
97

01

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

Note:
Source:

98

99

00
01
(monthly basis)Three-month moving average of seasonallyadjusted values based on X-11.
Ministry of Finance, “Foreign Trade Statistics.”

Backed by the buoyant US economy and the recovery of Asian economies, export volume(Figure 1-27a) continued to grow faster than in the same period of the previous year until AprilJune 2000. However, exports to the US fell in July-September 2000 due to the slowdown of the
US economy and recorded a double-digit decline from the previous year (down 11.3%) in
January-March 2001, with substantial drops in machines and appliances and in chemicals. The
growth in exports to Europe slowed as the euro continued to slide, and has stayed below thelevel of the previous year since October-December 2000. Exports to Asia, which led the growthof overall exports in 1999 and 2000, experienced a substantial slowdown mainly in machines andappliances as the US economy showed signs of leveling off. They finally recorded a decline fromthe previous year in January-March 2001.
Figure 1-27b shows the trend of shipments for export by type of goods according to theIndustrial Production Statistics. The trend since the latter half of 2000 has been characterized bydeclines in durable and non-durable consumer goods and sluggishness in capital goods following
a significant increase.
After turning upward in January-March 2000, import volume (Figure 1-28a) continued toincrease, backed by the mild recovery of the domestic economy. In January-March 2001,
however, its growth was reduced as imports slowed from Asia including machines andDevelopment Bank of Japan Research Report/ No. 19 15

appliances.
By type of goods (Figure 1-28b), imports of producer goods continued to increase, led bysemiconductor/integrated circuits, which accounted for the majority of the year-on-year growth.
The growth rate, however, declined slightly in January-March 2001. The growth of consumer
non-durable imports including textile products has also been slowing.
Figure 1-27. Trend of Export Volume (Year-on-year change by component)(％)
25

a. Export volume by destination

20

US
EuropeAsia
Others

15
10

(%)
25
20

World

0

0

-5

-5
-10

-10

Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ ⅡⅢ Ⅳ Ⅰ Ⅱ ⅢⅣ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ

Ⅰ ⅡⅢ Ⅳ ⅠⅡ ⅢⅣ Ⅰ ⅡⅢ ⅣⅠ Ⅱ ⅢⅣ Ⅰ
98

Capital goods
Construction materials
Durable consumer goods
Non-durable consumer goods
Producer goods
Total

15
10
5

5

97

b. Shipment for exports by type of industrial goods(seasonally adjusted)

99

00

97

01

98

99

00

01

Figure 1-28. Trend of Import Volume (Year-on-year change by component)
( ％)

（％）

a. Import volume by destination

25
20
15
10
5
0
-5
-10

US
EuropeAsia
Others

25
20
15
10
5
0
-5
-10

World

ⅠⅡⅢ ⅣⅠⅡ ⅢⅣ ⅠⅡⅢ ⅣⅠⅡ ⅢⅣⅠ

97

98

99

00

01

b. Imports by type of industrial goods(seasonally adjusted)Ⅰ Ⅱ Ⅲ ⅣⅠ Ⅱ Ⅲ Ⅳ ⅠⅡ Ⅲ Ⅳ ⅠⅡ Ⅲ Ⅳ Ⅰ
9798

Producer goods
Durable consumer goods
Capital goods

Sources:

99

00

01

Non-durable consumer goods
Construction materials
Total

Ministry of Finance, “Foreign Trade Statistics;” Ministry of Economy, Trade and Industry, “Summary of Analysis of
Mining and Manufacturing Industrial Activities.”

8. Weak Prospects for Overtime Hours and Job Offers
After some improvement in 2000, employment conditions appear to be deteriorating again.
Figure 1-29 shows that the ratio of job offers to applicants rose from the bottom of 0.46 in May
1999 to 0.66 in December 2000, but fell back to 0.62 in April 2001, as new job offers did notincrease in parallel with job seekers. The unemployment rate has stayed above 4.7% since 1999
and reached a record high of 4.9% in December 2000 and January 2001 (after the recalculation inseasonal adjustment in 2001). The number of unemployed (Figure 1-30) has been above 3 million
after seeing the substantial increase in 1998 and involuntary unemployment has changed little
since the economy bottomed out in April 1999.
16 Development Bank of Japan Research Report/ No. 19

Figure 1-29. Trends in Ratio of Job Offers to
Applicants and Unemployment Rate

Figure 1-30. Trends in Unemployment
by Reason for Job-seeking(%)(Times)(10,000 persons)

5.5

0.9

5.0

0.8

4.5

0.7

4.0

0.6

200

3.5

0.5

150

3.0

0.4
(CY quarterly basis)

2.5
95

96

97

98

99

00

0.3

400
350
300
250

100
50

(CY quarterly basis)

0

01

95

Unemployment rate
Ratio of job offers to applicants (right scale)
Sources:

Ministry of Public Management, Home
Affairs, Posts and Telecommunications,“Labor Force Survey;” “Ministry of Health,
Labor and Welfare, “Statistics on Placement
Activities.”

96

97

98

Involuntary severance
School graduates

Note:
Source:

99

00

01

Voluntary severance
OthersAny deviation between the total and the sum ofcomponents is included in “Others.”
Ministry of Public Management, Home Affairs,
Posts and Telecommunications, “Labor Force
Survey.”Figure 1-31 shows the percent change in the seasonally adjusted number employed. By
industry, the number employed is still rising in services but decrease in construction and others
surpassed recently for the first time in three quarters. The number of self-employed and family
workers continued to decline, while the number of part-time and daily workers fell in the mostrecent period after experiencing a steady increase. By corporate size, the number employed bymedium-sized firms (employing 30-499 workers) also fell in the most recent period after
increasing continuously from April-June 2000. The number of employees in large-sized firms(employing 500 or more workers) continued to stagnate.
Finally, Figure 1-32 shows the trend of overtime hours (seasonally adjusted), which is
supposed to be more sensitive to economic condition. Hours increased from around the
beginning of 1999 but then fell in 2001 in both manufacturing and non-manufacturing. The
previous downturn in overtime hours (July-September 1997) was followed by a deterioration in
employment itself. Moreover, consumers are increasingly pessimistic about future employment
conditions, as indicated by Figure 1-15. Hence, employment conditions have probably entered adeterioration phase again and attention will therefore be focused on future developments of thehigh unemployment rate.

Development Bank of Japan Research Report/ No. 19 17

Figure 1-31. Trend of Year-on-Year Change in Number Employed by Component(Seasonally adjusted)(2) Number employed by status(%)(1) Number employed by industry

(%)
1.5

1.5
1.0

1.0

0.5

0.5

0.0

0.0

-0.5

-0.5
(CY quarterly basis)

-1.0

-1.0
95

96
97
98
OthersServices
Transport/communications
Wholesale/retail and restaurants
Manufacturing
Construction
Total

99

00

01

1.5
1.0
0.5
0.0
-0.5
(CY quarterly basis)

-1.0
95

96

97

98

1-29 workers
500 workers or over
Note:
Source:

99

95

96

97

98

99

00

01

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

Figure 1-32. Overtime Hours(Seasonally adjusted)(3) Number employed by size ofcorporation (excluding government)(%)(CY quarterly00

0130-499 workers
Total

Seasonally adjusted with X-11.
Ministry of Public Management, Home Affairs,
Posts and Telecommunications, “Labor Force
Survey.”(Index, 1995=100)
125
120
115
110
105
100
95
90
85
80
95
96

Source:(CY quarterly basis)
97
All industries

98

99
00
Manufacturing

01

Ministry of Health, Labor and Welfare,“Monthly Labor Survey.”

9. Short-term Interest: Moving Around Zero with Quantitative Easing, Consumer
Prices: Continuing to Decline
From March 1999, the inter-bank overnight lending rate (unsecured call) stayed just above 0%
due to the zero-interest rate policy. Following the temporary abandonment of the policy inAugust 2000, however, the rate was guided to 0.25% until February 2001 (Figure 1-33). Since
then, the rate has returned to almost zero reflecting the effective reintroduction of the zerointerest policy with the adoption of the easy monetary policy and quantitative easing in February
and late March respectively.
Yields on three-month CDs (buy), which are representative of short-term interest rates,
showed a slight increase in late 2000 due to the termination of the zero-interest policy andseasonal demand for funds in the year-end period. In 2001, however, they declined slightly with
18 Development Bank of Japan Research Report/ No. 19

the disappearance of the special year-end factor, which was followed by a further decline to the
0.1% range with the resumption of the zero-interest policy.
Yields on long-term government bonds stayed around 1.8% since June 1999 and remained
stable with very little movement for about 10 months since October 1999. They rose to almost
2% in early September 2000, but have stayed around 1.3% in recent months.
Figure 1-33. Trends in Selected Market Interest Rates
(%)
2.5

2.0
1.5
Yield on long-term government bonds
Three-month CDs
Inter-bank overnight lending rate (unsecured)

1.0
0.5
0.0
99/1
Notes:
Source:

3

5

7

9

11

00/1

3

5

7

9

1. Yield on long-term government bonds represents that on 10-year bonds.
2. Three-month CDs are represented by the quotation (buy) rate on new issues.
Nihon Keizai Shimbun.

11

01/1

3
5
(monthly basis)

The year-on-year growth of money stock (M2+CD) stayed above 3.5% in general to the firsthalf of fiscal 1999, temporarily dropped to a low of 1.9% in the latter half of the year, and has
been recently in the 2% range (Figure 1-34). In detail, the growth of money supply accelerated as
cash deposits were accumulated instead of term deposits reflecting low interest rates. Meanwhile,lending by private banks continued to decline. After adjustments for special factors, the lending
has been decreasing at an almost constant rate. This trend reflects is due to the fact that thebanking sector, being rather reluctant to lend money, is preferring to invest in government bonds,
etc., in addition to sluggish demand for funds.
The quantitative monetary easing policy adopted by the Bank of Japan on March 19 is to be
maintained until the year-on-year growth of consumer prices (excluding perishables) stabilizes
above zero. Figure 1-36 shows the trend of consumer prices of goods and services. The decline
in the prices of agricultural, marine, livestock and industrial products has been accelerating
recently, while the prices of personal services (including publishing, rent and eating-out) andpublic utility changes (including electricity, city gas and water) have been stable or even declining
slightly. For the whole fiscal 2000, consumer prices declined 0.5% for the second consecutive
year. On a quarterly basis, they have fallen for 11 consecutive quarters since April-June 1998.
This trend meets one of the conditions of deflation defined by the Cabinet Office in March 2001,
namely, a protracted decline in prices.
Corporate service prices, calculated as an index excluding international maritime and airtransport charges, which rose due to overseas factors, have been falling from the previous year
since April-June 1998, mainly for communications (including telephone and special lines),
financial charges and lease charges (including computers and communication equipment). The
decline in prices has been accelerating recently for communications and leasing in particular,
indicating an even stronger downtrend since late 2000. Thus, prices have been falling almost
across the board, including consumer and service prices.
Development Bank of Japan Research Report/ No. 19 19

Figure 1-34. Growth of Money Supply

Figure 1-35. Trends in Bank Loans(Change on previous year)

(%)
6
5
4
3
2
1
0
-1
-2
-3
99/1

5

9

00/1

Cash currency
Quasi-money
Total
Note:
Source:

5

9

01/1

5

2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
-4.0%
-5.0%
-6.0%
-7.0%
98/1 4

Deposit money
CDs

Average balance, change on previous year.
Bank of Japan, “Financial and Economic Statistics
Monthly.”

7 10 99/1 4

7 10 00/1 4

7 10 01/1 4

Outstanding bank loans
Outstanding bank loans (after adjustments for
extraordinary factors)
Real deposits + financial bonds + loan trusts

Note:

Real deposits do not include deposits in longterm trust banks and trust banks.
Bank of Japan, “Trends in Absorption ofLending.”

Source:Figure 1-36. Trends in Consumer Prices (Excluding Fresh Foods) and Corporate Service
Prices (Excluding Overseas Factors)(year-on-year change by component, %)4Consumer prices (excluding fresh foods)

3(CY quarterly basis)

2
1
0
-1
-2

Corporate service prices (excluding overseas factors)-390Notes:

Sources:

91
92
93
94
Public services, etc.
Personal services, etc.

95
96
97
98
99
Agriculture, marine, livestock and industrial products00

1. Personal services, etc. include publications, rent and eating-out. Public services, etc. include electricity, city gas
and water supply.
2. Corporate service prices (excluding overseas factor) represent a corporate service price index excludinginternational maritime and air cargo transport.
Bank of Japan, “Price Indexes Monthly;” Ministry of Public Management, Home Affairs, Posts andTelecommunications, “Consumer Price Index.”

20 Development Bank of Japan Research Report/ No. 19

01II. The Japanese Economy under Deflation
1. Introduction
The Japanese economy in the 1990s was characterized by falling prices as well as by a downturnin growth rate. In 1999 and 2000, the consumer price index declined for two years running forthe first time in the post-war period. The trend has been accelerating in recent years as the GDP
deflator fell in both 1995 and 1996, and then dropped again for three consecutive years from1998 to 2000. Against this backdrop, the Cabinet Office made the following remarks in its
Monthly Economic Report in March:“Although there are various arguments on the definition of deflation in Japan, the Japanese
economy is currently experiencing a mild deflation if deflation is defined as a “protracted decline
in prices.”4This chapter considers the various causes of deflation and its impact on the real economy,
and analyzes some aspects of the Japanese economy under deflation based on relevant data.
2. Deflation and Structural Issues of the Japanese Economy
In a market economy, price fluctuations reflect the changing conditions of supply and demand.
Thus, deflation (a protracted decline in prices) is the phenomenon that reflects all the aspects ofstructural problems (or structural changes) of the Japanese economy on both the supply anddemand sides.
In a standard Keynesian model, real GDP (Y) and price level (P) are determined by the pointof intersection between the aggregate demand curve (AD), which runs from upper left to lower
right and shows the macroeconomic condition for the balance of supply and demand in themarkets of goods and money on the one hand, and the aggregate supply curve (AS), which runs
from lower left to upper right and is premised on the nominal rigidity of wage or prices on theother (see the conceptual chart on page 36). Thus, the decline in prices is caused by the rightward
shift of the aggregate supply curve(①), the leftward shift of the aggregate demand curve (②), or
both (③).5
Bearing in mind the condition of the Japanese economy in recent years, structural factors
behind falling prices include technological progress and the improvement of productivity (electricmachinery, etc.), deregulation and increased new entrants into markets (telecommunications,finance, energy, etc.) and increased imports (foods, textile products) on the supply side, as well as
curbed consumption in the household sector due to uncertainties about the future and restriction
on plant and equipment investment in the corporate sector due to incessant pressure forrestructuring on the demand side.
Basically, factors on the demand side largely stem from balance sheet problems in all sectors,
but it is also possible that the resultant sustained decline in prices is in turn creating new balance
sheet problems through increased debt burden in real terms. In addition, deflation may restrict
economic activities as real interest rates and real wages tend to remain at high levels. In particular,
the so-called deflationary spiral (chain reaction of falling prices and deteriorating income levels)
may emerge if price declines are led by the demand side (②).
The decline in prices led by the supply side (①) is sometimes called “good deflation” as it isaccompanied by positive GDP growth. However, it does not necessarily reduce the GDP gap
4

5

Reasons and background for revising the definition of deflation are discussed in detail in Naoki Okamoto (2000) “Defure ni
Chokumen suru Wagakuni Keizai: Defure no Teigi no Sai-seiri wo Fukumete (The Japanese Economy Faced with Deflation:
Including the Review of the Definition of Deflation), Cabinet Office Economic Assessment and Policy Analysis Discussion Paper.
Prices may decline not only with the shift of the curves but also with the change in their shape (slope or curvature). The lattercase is not considered here for the sake of simplicity.
Development Bank of Japan Research Report/ No. 19 21

because it entails an increase in full employment income (YF). Moreover, some factors thatinduce the rightward shift of the aggregate supply curve, such as the increase in low-priced
imports, may not result in the growth of GDP as they also induce the leftward shift of theaggregate demand curve at the same time (③).
Relevant policies should pay close attention to the fact that neither structural reforms toincrease potential supply (the rightward shift of the aggregate supply curve) nor final disposal of
non-performing loans may accelerate the deflation unless accompanied by a corresponding
increase in demand, and that an increase in demand cannot be guaranteed automatically. Even
though it is important to create an environment for generating demand through such measures asderegulation, provisions should be made for the risk of decline of the economy, including
financial policies, as such measures may not bear fruit overnight.
Within the framework described above, the following sections analyze the background andimpact of the deflation.
Economic globalization (transition of ex-socialist countries to market economies, innovation of IT
and financial technologies)● Mega-competition (between companies, regions and institutions)● Emergence of vast and global capital markets (pressure on markets for higher efficiency)● Standardization of competition rules (IAS, BIS, ISO)

Aggregate supply
Price level P

AS

AS’

Aggregate demand
AD
AD’

Increase in real Purchasing power
Control on consumption, preference
for low prices

Control on plant andequipment investment,
Wage reduction andpressure for cutbacks on
employment,
Increase in bankruptcies

Increase in supply

P0

Reduction in demand

Reform of budget
structure

Technological advances,improved productivity①②③(possibly accompanied byrightward shift of AD)

Deregulation, increased
new entries (possibly
accompanied by rightward shift ofAD)

Increase in imports(possibly accompanied byleftward shift of AD)

Price war businesses

Sustained decline in prices = deflation

Continuation of high real interest rates
Continuation of high real wages

Y0

YF

YF’

Real Output Y

Aging with decreasing birthrate, decline in expected nominal growthConcerns of households about
futureDecline in permanent income

Restless pressure for restructuring on
corporate, financial and government
sectors

Balance sheet problems (asset deflation, liability deflation)● Household sector: unrealized losses on financial assets (including pensions) and real estate, debt burden● Corporate sector: unrealized losses on financial assets and real estate, debt burden● Financial sector: non-performing debts, pay off, negative spreads in life insurance● Government sector: budget deficits, pension and social welfare problems
Impact of purchasing power transfer → distortion on real economy
Impact of net losses → ultimately borne by population regardless of where problems emerge

Aftershock of bubble economy

Source:DBJ.

22 Development Bank of Japan Research Report/ No. 19

3. Falling Prices Explained by both Supply and Demand Factors
This section first looks at the trend of the Japanese economy in terms of output and price level,
namely the developments of real GDP and GDP deflator, to determine which of the above threeroutes in the aggregate demand/aggregate supply (AD-AS) model characterizes the current
deflation. (Figure 2-1: The real GDP and GDP deflator are both seasonally adjusted. Seasonallyadjusted values for the deflator are calculated by the DBJ.)
Figure 2-1. Macroeconomic Change in Output and Price Level (Horizontal axis = real
GDP (¥ trillion), vertical axis = GDP deflator)
101
93/Q4

100
97/Q1

99
99/Q2

98
91/Q1

97
96

01/Q1

95
90/Q1

94
440

Note:
Source:

460

480

500

520

540

Real GDP and GDP deflator are both seasonally adjusted. (Seasonal adjustment of deflator was madeby DBJ based on implicit deflators, calculated from original series of nominal and real GDP.)
Cabinet Office, “Annual Report on National Accounts.”

Based on the movement of prices (=deflator), the Japanese economy since 1990 may belargely classified into the inflationary period until October-December 1993 (the trough of the 11th
cycle) and the subsequent deflationary period. The decline in prices has accelerated since 1999 inparticular. Looking at this trend in more detail, the deflator rose relatively fast, due mainly tosupply side factors such as the Gulf War, as the Heisei boom peaked in February 1991 and thegrowth of real GDP leveled off. From 1992 to 1993, the pace of price inflation slowed due to thedisappearance of the supply side factors. Meanwhile, real GDP remained stable as the decline inprivate demand following the collapse of the bubble economy was largely offset by the growth of
public demand. The phenomenon of “disinflation” emerged in the period between 1994 and1996, where the growth of real GDP was accompanied by a mild decline in the deflator. As
demand stayed firm with the recovery of plant and equipment investment and increase in public
investment, the “price war” trend gradually gained strength on the supply side,6 supposedly
resulting in a sustained rightward shift of the aggregate supply curve. The year of 1997 starts with6

See Economic Planning Agency, “FY 1995 Annual Economic Report,” for example.
Development Bank of Japan Research Report/ No. 19 23

the eleventh-hour demand before the consumption tax hike and the rise in deflator, then theeconomy turned downward initially in reaction to that. In 1998, strong downward pressure on
the demand side, including the monetary and economic crisis in Asia, the rapid yen appreciation,
uncertainties about the domestic financial system and the worsening credit crunch, culminated in
the decline of the deflator and the negative growth of real GDP, thus raising concerns about thepossibility of a deflationary spiral.
In the economic expansion phase from 1999 until recently, the growth of real GDP was
accompanied by a decline in the deflator, a movement similar to that observed, the recent trend
has been substantially different in that it was marked by a decline in the deflator rather than by
the growth of real GDP. Indeed, the deflator dropped even faster than in the 1997-98 period,
when the risk of a deflationary spiral emerged. According to the conceptual chart on page 40, thedisinflation period was characterized by falling prices led by the supply side (①), while both the
supply and demand factors seem to have exerted downward pressure on prices (③) in theeconomic expansion period from 1999. The recent falls in prices may be attributed to
uncertainties about the future in the household sector and incessant pressure for restructuring on
the corporate sector, and more fundamentally to the structural weakness of demand resulting
from economic globalization and balance sheet problems.
Figure 2-2 describes the background of falling prices in the late 1990s in terms of the
movements of output and price level by industry according to the Annual Report on National
Accounts. The figure shows output level (=real GDP) and price level (=deflator) in 1999 byindustry with 1995 as the base year (=100). The decline in prices was most significant in electricmachinery among manufacturing industries and in telecommunications among nonmanufacturing industries. At the same time, output increased substantially in those two industries,
resulting in a slight increase in nominal GDP, which is equal to the product of output and price.
(The hyperbolic curve in the figure represents the 1995 level.) Price reductions and output
increases were also observed simultaneously in other industries such as chemicals,
finance/insurance, electricity/gas and business services. Apparently, the decline in prices in such
Figure 2-2. Change in Output and Price Level by Industry (Index for 1999, 1995=100)(Price)Manufacturing(Price)

Foods

100

110
Textiles100

Non-manufacturing

110

120

General machinery
Metal products
Cement, ceramics
ceramics & glass

Iron & steel

90

Oil & coalTransport equipment
Precision machinery

Construction
Transport
RetailWholesalFinance & insurance
Business services
Electricity & gas

Agriculture, forestry
and fisheries

90

Paper & pulp
Non-ferrous metals

Personal services
Public services

Manufacturing average

80

Chemicals

80
Electric
machinery70

Mining70

Telecommunications

60

70

80

90

100

110

120

130

140

150

(Output)

Notes:

Source:

70

90

110

1. Real estate is excluded due to the inclusion of imputed rent for owned houses.
2. The hyperbolic curve in each chart indicates the combination of output and pricethat corresponds to 100 in nominal GDP. Nominal GDP is over 100 in the upper
right portion, while it is less than 100 in the lower left portion.
Cabinet Office, “Annual Report on National Accounts.”

24 Development Bank of Japan Research Report/ No. 19

130

150

170
(Output)industries was led more or less by the supply side. On the other hand, price reductions inmaterials industries, agriculture, forestry and fisheries among others were seemingly led by thedemand side, because they were accompanied by declines in output.
4. Increased Imports Contributing to Falling Prices
This section seeks to identify the characteristics of recent price movements based on consumer
price index (CPI) and domestic wholesale price index (WPI).
Figure 2-3 compares the trends of CPI excluding fresh foods and WPI of consumer goods.
The former index fell slowly from around 1995, excluding the impact of the consumption tax
hike, and the latter also declined from around 1993. In 1998 and 1999, the fall of CPI was a little
slower than that of WPI. Since 2000 however, the decline in WPI has been slowing, whereas thatof CPI has been accelerating relatively. (The decline of CPI/WPI ratio has slowed since 2000.)
Which types of goods have led the accelerated drop of CPI recently? Figure 2-4 shows theyear-on-year growth of CPI excluding fresh foods by component. The prices of general goods
have declined constantly since January-March 1998, when CPI as a whole turned down on theprevious year, thus greatly contributing to the drop of overall prices. Since July-September 2000
in particular, price reductions have been accelerating mainly for furniture and house furnishings
as well as clothing and footwear. Moreover, the prices of general services have been declining on
the previous year since turning down in July-September 2000, pointing to the weakness of
consumer prices in general.
The trend of WPI is shown in Figure 2-5. The prices of materials and oil rose in 2000 due tothe price hike for crude oil, pushing upward the overall level of WPI. Meanwhile, the decline ofmachine and appliance prices continued, particularly for electric appliances, transport equipment
and precision instruments in the latter half of fiscal 2000.
Figure 2-3. Domestic Wholesale Price Index(WPI) and Consumer Price Index (CPI)(1995=100)
1.10

105
104
103
102
101
100
99
98
97
96
95

1.05

1.00

0.95
ⅠⅡⅢⅣⅠⅡⅢⅣⅠⅡⅢⅣⅠⅡⅢⅣⅠⅡⅢⅣⅠⅡⅢⅣⅠⅡⅢⅣⅠⅡⅢⅣⅠⅡⅢⅣⅠⅡⅢⅣⅠⅡⅢⅣⅠ
90

91

92

93

94

95

96

97

98

99

00

01

WPI for consumer goods (A)CPI (excluding fresh foods) (B)(A)/(B) ratio (right scale)
Sources:

Bank of Japan, “Wholesale Price Index;” Ministry of Public Management, Home Affairs, Posts andTelecommunications, “Consumer Price Index.”

Development Bank of Japan Research Report/ No. 19 25

Figure 2-4. Year-on-Year Change inConsumer Price Index by(Excluding fresh foods)

Figure 2-5. Year-on-Year Change in
Wholesale Price Index (WPI) by
Component

(%)
3

1.0

2

0.6

1

0.2

0
-1

-0.2

-2

-0.6

-3

Ⅰ ⅡⅢ Ⅳ ⅠⅡ Ⅲ Ⅳ ⅠⅡ Ⅲ ⅣⅠ Ⅱ ⅢⅣ Ⅰ
97

98

99

00

01

Public utility charges and services
General services
General goods
Change on previous year

Note:
Source:Adjusted for consumption tax hike.
Ministry of Public Management, Home
Affairs, Posts and Telecommunications,“Consumer Price Index.”

ⅠⅡ Ⅲ ⅣⅠ ⅡⅢ Ⅳ ⅠⅡ ⅢⅣ ⅠⅡ Ⅲ ⅣⅠ
97

98

99

00

01

OthersOil, coal and non-ferrous metals
Machines and appliances
Materials and intermediate goods
Change in aggregate average on previous year

Note:
Source:Adjusted for consumption tax hike.
Bank of Japan, “Wholesale Price Index.”

In order to highlight the factors behind the decline in WPI, Figure 2-6 breaks down thetrend of WPI for machines and appliances, which continues to fall, into the following factors:
costs, demand, import prices and import penetration.7 The estimation indicates a sustained
decline of WPI for machines and appliances since 1998, but the major factors behind the declinechanged in the second half of fiscal 1999. Until the first half of fiscal 1999, the decline was largely
attributable to the deterioration of supply-and-demand balance due to the sluggish domestic
economy. In the latter half of the year, however, supply-and-demand balance improved with thegradual recovery of domestic demand, while other factors for falling prices emerged, including
cost reduction due to the decline in imported raw material prices induced by the yen appreciationand the improvement of productivity through corporate self-help efforts, and widespread pricecompetition between imports and domestic goods.

7

The estimation was made according to OLS (estimation period: April-June 1983-October-December 2000) with the following
formula: ln (WPI excluding oil and coal)=(constant term)+α(the break-even point ratio)+β(diffusion index on supply anddemand of goods)+γln (import price index)+σ(share of imports in aggregate domestic supply). In calculating the breakeven sales, fixed cost was regarded as (personnel expenses + depreciation expenses + paid interest) – (received interest +other non-operating profits), and variable cost as all costs other than fixed cost. The diffusion index on the supply anddemand of goods of the BOJ Tankan, which was adopted as a surrogate variable for the supply-and-demand gap, has shown atrend relatively similar to that of the supply-and-demand gap estimated by the Cabinet Office in “Current Condition of theJapanese Economy 2000,” etc.

26 Development Bank of Japan Research Report/ No. 19

Figure 2-6. Year-on-Year Change in WPI (Machines and Appliances) by Component
6
4
2
0
-2
-4
Ⅰ

Ⅱ

Ⅲ
98

Ⅳ

Ⅰ

Ⅱ

Ⅲ
99

Ⅳ

Ⅰ

Ⅱ

Ⅲ

Ⅳ

00

OthersImport penetration factor
Import price factor
Demand factor
Cost factor
Change on previous yearr
Note:
Sources:

Cost factor and demand factor are estimated with OLS, using the break-even point ratio and diffusion index for the
supply and demand of products respectively.
Bank of Japan, “Wholesale Price Index” and “Nationwide Tankan;” Ministry of Economy, Trade and Industry,“Aggregate Industrial Supply Table;” Ministry of Finance, “Quarterly Report of Statistical Survey of Incorporated
Enterprises.”

Factors such as the improvement of production technologies in Asian countries, increase inoverseas direct investment and development imports, and the decline in yen-based import prices
underlie the increased penetration of imports into the domestic market in recent years. In
particular, yen-based import prices dropped substantially in 1999 and 2000. In order tounderstand the background of this trend, Figure 2-7 breaks down the import price index for two
representative products into several factors.8

8With M(F): price index calculated from trade statistics (Fisher’ formula, on a yen basis), M(L): price index calculated fromtrade statistics (Laspeyres formula (constant volume in base period), on a yen basis), M(P): price index calculated from trade
statistics (Paasche formula (constant volume in comparison period),on a yen basis), B(L): Bank of Japan import price index(Laspeyres formula, on a yen basis), and Bf(L): BOJ import price index (Laspeyres formula, on a contract currency basis), thefollowing relationship holds:
M(F) = √(M(L)×M(P))=M(L)/B(L)×√(M(P)/M(L))×B(L)/Bf(L)×Bf(L)= (higher value added or cost reduction for the same product)×(sophistication of product composition)×(foreignexchange factor)×(market factor).
With reference to the Cabinet Office, “FY 2000 Annual Economic Report,” etc., a qualitative change in the same product isconstrued here as “the ratio of BOJ price to unit price on a customs clearance basis considering product quality,”
sophistication of product composition as “the ratio of volume in the base period to volume in the comparison period when
prices are treated as constant,” foreign exchange fluctuation as “the ratio of yen-based price to contract currency-based price,”and market price fluctuation as “contract currency-based price (≒international price).” The “cost and composition change”
factor in the graph is the sum of higher values added for the same product and sophistication of product composition.
Development Bank of Japan Research Report/ No. 19 27

Figure 2-7. Import Price Index (Trend of year-on-year change by component)② Electric machinery(including personal computers)① Textiles
30
20
10
0
-10
-20

25
15
5
-5
-15
-25
97

98

Ⅰ

Ⅱ

Ⅲ
99

Ⅳ

Ⅰ

Ⅱ

Ⅲ
00

Ⅳ

Ⅰ
01

OthersMarket factor
Foreign exchange factor
Cost and composition change factor
Change on previous year

Note:

Sources:

97

98

Ⅰ

Ⅱ

Ⅲ
99

Ⅳ

Ⅰ

Ⅱ

Ⅲ
00

Ⅳ

Ⅰ
01

OthersMarket factor
Foreign exchange factor
Cost and composition change factor
Change on previous year

Change on previous year is for prices calculated with the Fisher formula from Ministry of Finance, “Foreign Trade Statistics” (1995
as base year). “Cost and composition change factor” represents the total of the ratio of the prices calculated with the Laspeyres
formula (constant volume in base period) from the Foreign Trade Statistics to BOJ’s (yen-based) import price index (change inquality, etc. for the same product) on the one hand, and the ratio of the price calculated with the Paache formula (constant volume incomparison period) from the Foreign Trade Statistics to the Laspeyres formula price (change in product composition) on the other.
The calculation of “Foreign exchange factor” and “Market factor” is based on the ratio of the yen-based prices to contract currencybased prices of BOJ’s import price index and the contract currency-based growth of BOJ’s import price index respectively.
Ministry of Finance, “Foreign Trade Statistics;” Bank of Japan, “Wholesale Price Index.”

Import prices for textiles continued to stay below the level of the previous year from 1998 to
2000. Major factors behind the decline include not only the yen appreciation but also the
reduction of production cost for textile products in Asia and other countries. The costcompetitiveness of foreign products has also increased because the operation of Japanese textile
manufacturers in China, etc. has improved local production technologies. This trend, which
emerged clearly in 1999, has been continuing but its contribution to the price decline has reducedof late, partly due to the yen depreciation.
As in the case of textiles, import prices for electric machinery including personal computers
fell from 1999 to July-September 2000, influenced by the yen appreciation. At the same time, theperformance and functions of imports have been upgraded, particularly since January-March
2000. This attests to the increase in the value added to overseas products due mainly to thetransfer of production facilities overseas for audio-visual equipment, etc. as well as to increased
production of semiconductors and other electronic devices in Asian countries including Taiwan
and South Korea.
Thus, the factors behind the decline in import prices that continued to 2000 varyconsiderably among individual products.
5. Loan Repayment Burden Restricting Consumption Despite Stable Real Income
The impact of falling prices on consumption is perceived as “cheaper goods and services.”
Figure 2-8 shows the year-on-year change in real wage as purchasing power in relation to the total
cost of living. Inflation, once common during the post-war expansion, largely offset the increasein nominal wage until early 1994, but its impact has waned since around 1995 as prices stabilized.
On the other hand, nominal income has been improving recently, as mentioned in Chapter 1,
following declines on the previous year in 1998 and 1999. It is clear that the decline in consumer
prices, which has become significant since 1999, has contributed to raise real income often morethan the increase in nominal terms.
28 Development Bank of Japan Research Report/ No. 19

Figure 2-8. Real Wages (Trend of year-on-year change by component)
(%)
6
5
4
3
2
1

CPI (excluding imputed rent)
Nominal wage index
Wage index converted into real terms

0
-1
-2
-3
-4

(CY quarterly basis)
92

Note:
Sources:

93

94

95

96

97

98

99

00

01

Conversion into real terms was made with the quarterly data on nominal wage index and CPI (excluding imputed rent)
calculated from monthly data.
Ministry of Health, Labor and Welfare, “Monthly Labor Survey” (business establishments employing 5 or moreworkers); Ministry of Public Management, Home Affairs, Posts and Telecommunications, “Consumer Price Indexes
Monthly.”

Consumers appear to welcome the decline in prices. The consumer confidence indicator on
price inflation in the Survey on Consumption Trends (Figure 2-9) has moved almost in reverse to
the year-on-year change in consumer prices, showing that the benefit of falling prices is being felt
by consumers, even though the price movement has been relatively small, around zero. Of course,
consumers may consider the price deflation as a sign of future economic downturn, however,direct effect of deflation on consumers are considered as the positive factors mentioned above.9
In contrast, the sluggish growth of nominal consumption has been reported on the supply
side as a slow sales growth. Figure 2-10 shows the changes of volume and unit price in the 1990s
for clothing, which is generally thought to have experienced a substantial decline in prices. For
each year, the annual growth of volumes and unit prices for the 29 product items covered by the
Family Income and Expenditure Survey (all households with two or more members excluding
agricultural, forestry and fishery households) is averaged by the expenditure shares in theprevious year.10 The 45-degree line running from upper left to lower right indicates the
combination of volumes and unit prices that results in the same purchase value as in the previous
year. The area to the upper right of the 45-degree line means that the purchase value exceeds thelevel of a year ago, while the area to the lower left of the line means that the value is lower. Unit
prices declined in seven years in the 1990s, and volumes also decreased in seven years.
Consequently, purchase value dropped, from the previous year in every year except 1991 and, inparticular, the purchase value declined whenever unit prices fell. It can therefore be concluded
that the significant drop in prices in the 1990s was not compensated by a corresponding increasein sales volume.11

9

In the questionnaire, price reduction is placed in line with other positive factors, and is treated as such in calculating thecomposite index.
10
Unit purchase prices are calculated here according to the classification in the Family Income and Expenditure Survey, and noqualitative considerations are adopted such as brand designation in the case of price indices.
11
In the 10-year period between 1981 and 1990, unit prices rose in all years while purchase value increased in every year except
1981 and 1984.
Development Bank of Japan Research Report/ No. 19 29

Figure 2-9. Consumers’ Attitude toward
Falling Prices

Figure 2-10. Change in Unit Purchase
Price and Purchase Volume of Clothingon Previous Year(%)(index)60
55
50(unit price, %)

3

10

2

5

1

0

91
96

45
40

97
98

35
30

0

25

(CY quarterly basis）

20
95

96

97

98

99

00

-1

01

Consumers’ attitude toward falling prices
Year-on-year change in CPI (right scale)

Note:

Sources:

Consumers’ attitude toward falling prices
represents the seasonally adjusted ratio(diffusion index) of people who perceive thatprices are falling.
Cabinet Office, “Survey on Consumption
Trends;” Ministry of Public Management,
Home Affairs, Posts and Telecommunications,“Consumer Price Index.”

Purchase value:
increase

95

94

92

Purchase value: decrease

-5

99 93

00

-10
-6

-4

-2

0

2
(volume, %)Note:

Source:Average of year-on-year change in unit price andvolume weighted by purchase value in theprevious year for the 29 clothing items for whichpurchase values and purchase volumes areavailable.
Ministry of Public Management, Home Affairs,
Posts and Telecommunications, “Annual Reportof Family Income and Expenditure Survey.”

Although the weak consumption is confirmed, the Family Income and Expenditure Survey
also shows a constant decline in the share of “clothing and footwear” in total expenditure from
7.3% in 1991 to 5.1% in 2000, while the shares of “transport and communications,” “culture andentertainment,” etc. increased. In light of such changes in consumption pattern, consumers are
not necessarily cutting back in spending to the detriment of their own utility. To argue the impact
of deflation on the level of overall consumption, we should examine additional elements otherthan the income compensation; future economic conditions or the impact of debts contracted in
the past.
The impact of falling prices on savings in a broad sense or on future purchasing powerincludes the erosion of savings, i.e. the reduction of interest income and pension benefits bylowered interest rates. As households invest half of their savings in real assets including land andhousing, any decline in asset prices brings a corresponding loss to them. On the liability side,although the household sector as a whole has more savings than liabilities, the real interest
burden on housing and other loans may be heavier than initially expected, because interest rates
on most of such loans are fixed in nominal terms.
Based on the National Survey of Family Income an Expenditure, Figure 2-11 shows theshare of households that are repaying housing loans in all households with two or more members
and outstanding of their savings and liabilities. Although the share has lowered slightly, loanrepaying households still account for about one third of all households. Net savings stood at¥170,000 in 1989 for loan-repaying households but turned negative in 1994, whereas they havebeen positive and increasing in the household sector as a whole. Net liabilities for loan-repaying
households amounted to ¥3.93 million in 1999. This will be explained by multiple factors:
housing purchases with loans may have increased, or existing loan-repayment households may
30 Development Bank of Japan Research Report/ No. 19

have fallen behind schedule. In any case, it is clear that the gap in net savings has widened
between loan-repaying households and other households.
As shown in Figure 2-12, the share of loan repayment in disposable income in loan-repaying
households rose in the 1990s, reaching almost 20% in 2000.12 The impact of such increase inloan repayment burden on consumption can be observed from the year-on-year change in
consumption expenditure shown in the same figure. Although the consumption of loan-repaying
households fluctuates more, possibly due to smaller number of samples, consumption
expenditure in those households has decreased from the previous year for four consecutive years
since 1997. The decrement, which is larger than for other households, reflects the slump ofconsumption in loan-repaying households.
That is, loan-repaying households have become increasingly unwilling to consume. As
mentioned earlier, however, households with positive net savings cannot avoid the erosion of real andfinancial assets, either. Although falling prices have a positive function of directly raising thepurchasing power of the household sector, they work negatively in terms of stock. As will be
discussed later, the negative impact of falling prices will be amplified, if they are identified with theslowing of economic growth, and eventually with the downward revision of, and uncertainties about,future income.
Figure 2-11. Ratio of Housing Loan-repaying
Households and Net Liabilities(%)(10,000)
2000

35

Figure 2-12. Year-on-Year Change inConsumption Expenditure of Housing
Loan-repaying Households
(%)
8
6

1500

34

1000

33

2

500

32

0

0

31

4

30

-500
89

94

99

Savings – liabilities (housing loan-repaying households)
Savings – liabilities (other households)
Ratio of housing loan-repaying households

Note:Source:(CY)

Total represents workers’ households with two or
more members.
Ministry of Public Management, Home Affairs, Posts
and Telecommunications, “National Survey on
Consumption.”

-2
-4
-6

(%)
20
18
16
Housing loan
14
repayment/disposable
income ratio (right scale)
12
10
8
6
4
Housing loan-repaying households
2(CY)
No liabilities
0
90
92
94
96
98
00

Note:
Source:Total represents workers’ households with two or
more members.
Ministry of Public Management, Home Affairs,
Posts and Telecommunications, “Annual Reportof Family Income and Expenditure Survey.”

That is, loan-repaying households have become increasingly unwilling to consume. As
mentioned earlier, however, households with positive net savings cannot avoid the erosion of real andfinancial assets, either. Although falling prices have a positive function of directly raising thepurchasing power of the household sector, they work negatively in terms of stock. As will be
discussed later, the negative impact of falling prices will be amplified, if they are identified with the12

Of course, the share of housing cost in consumption expenditure (average for 2000) is smaller (1.6%) in loan-repaying
households than in other households (5.5%). Although imputed rent is not included here, the size is not comparable to theburden of loan repayment.
Development Bank of Japan Research Report/ No. 19 31

slowing of economic growth, and eventually with the downward revision of, and uncertainties about,future income.
6. Corporate Profits Secured by Reduced Personal Cost Despite Downtrend in Sales
Prices
Falling prices have various direct and indirect impacts on corporate profits through the change in
relative price as well as the change in sales volume. Falling prices are generally considered as anegative factor for corporate profits, but empirical studies are required to identify the magnitude
and timing of such impacts.
Trends in output and input prices, shown in Figure 2-13, indicate that input prices declined
substantially until around 1998, largely improving the profit environment (terms of Output/Input
price index). Since 1999, however, input prices have recovered slightly, and output prices havestabilized, possibly resulting in a slight erosion of corporate profits.
The most notable effect of falling prices is the increase in real wage due to the rigidity of
nominal labor cost. Setting aside any other costs required for improving productivity (equipmentrelated cost, education/training cost, etc.) however, the growth of personnel cost should beabsorbable if it stays lower than the increase in labor productivity. Figure 2-14 compares thetrend of real wage cost per employee and that of labor productivity. Although the real wage
based on output prices has increased constantly, its growth has been slower than the increase inproductivity since 1999.
In light of the above observations, Figure 2-15 shows the change in the ratio of ordinary
profit to sales for large-sized manufacturers by component based on the Statistical Survey ofIncorporated Enterprises to identify the impact of price fluctuations.13 The ratio of ordinary
profit to sales since 1999 has improved due to an increase in labor productivity that substantiallyexceeded the growth of real wage, which continued to make a negative contribution due to thedecline in output prices. Although the increase in sales volume thanks to economic recovery was
the major factor behind the improvement of productivity, personnel cutbacks have also made an
unprecedented contribution.

13

The concept of the factor resolution is as follows.
① Taking as variable costs all costs other than the typical fixed costs of personnel expenses, depreciation expenses and interest
paid including amortization of bond premia, the year-on-year change in the ratio of ordinary profit to sales is resolved into theyear-on-year change in marginal profit ratio (=1 – the ratio of variable costs to sales) and the year on year change in the ratioof fixed costs to sales. The former (Factor A) reflects the change in relative price between output and input and the change inbasic input unit (volumes of raw materials, fuels, etc. required for producing one unit of product), among others.
② The year-on-year change in the ratio of fixed costs to sales is resolved into the real wage effect (Factor B), which indicates the
direct impact of the change in output prices on per capita personnel expenses, the effect of changing labor productivity andthe effect of changing depreciation and interest cost (Factor E). The effect of labor productivity is further resolved into theeffect of changing sales volume (Factor C) and the effect of changing work force (Factor D).
The factor resolution is expressed as (S=O×p, OP=MP – (PE+F), PE=L×w),
where
S: sales, MP: marginal profit, PE: personnel expenses, F: depreciation expenses + interest paid including amortization of bondpremia, OP: ordinary profit, O: sales volume, p: sales price, L: work force, and, w: per capita personnel expenses.
Δ(OP/S)= Δ(MP/S) + (PE0/S)(Δp/p0−Δw/w0) + (PE0/S)(ΔO/O0) – (PE0/S)(ΔL/L0) –Δ(F/S)(↑Factor A)(↑Factor B)(↑Factor C)(↑Factor D)(↑Factor E).
The suffix of a small 0 indicates previous year’s value. Δ indicates change on the previous year.
ΔO/O0 andΔw/w0 were calculated from (ΔS/S0 –Δp/p0) and (ΔPE/PE0−ΔL/L0) respectively. Manufacturing output priceindex was used forΔp/p0.
32 Development Bank of Japan Research Report/ No. 19

Figure 2-13. Trends in Input and Output Figure 2-14. Trends in Real Wage Cost
Prices in Manufacturing Sector (1995=100)
and Labor Productivity in Manufacturing
Sector (seasonally adjusted, 1995=100)120

115
Output/Input price index
Output price index
Input price index

110

Real wage cost index
Labor productivity index

115
110
105

105

100
95

100

90

95

85

(CY quarterly basis)

90

Source:

91

92 93

94

95

96

97

98 99

00

(CY quarterly basis)

80

90

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

01

Bank of Japan, “Price Indexes Monthly.”Note:

Sources:

Real wage cost index ≡ nominal wage
index/output price index (after adjustment for
consumption tax). Labor productivity index≡
manufacturing production index/number ofworkers.
Bank of Japan, “Price Indexes Monthly;”
Ministry of Health, Labor and Welfare, “Monthly
Labor Survey;” Ministry of Public Management,
Home Affairs, Posts and Telecommunications,“Labor Force Survey;” Ministry of Economy,
Trade and Industry, “Industrial Index.”Figure 2-15. Ratio of Ordinary Profit to Sales of Major Manufacturers (Trend of year-onyear change by component)(% points)

3.0
2.0
1.0
0.0
-1.0
-2.0
(CY quarterly basis)

-3.0
91

92

93

94

95

96

97

98

99

00

01

A. Year-on-year change in ratio of marginal profit to sales
B. Real wage effect
C. Labor productivity effect (of which sales volume effect)
D. Labor productivity effect (of which personnel effect)
E. Depreciation and financial cost effectYear-on-year change in ratio of ordinary profit to sales
A indicates the change in relative price between output and input.
B indicates the direct impact of changing output prices on personnel cost.

Note:
Sources:Marginal profit ≡ ordinary profit + (personnel cost + depreciation + interest paid including amortization of bond premia).
Ministry of Finance, “Quarterly Report of Statistical Survey of Incorporated Enterprises;” Bank of Japan “Price Indexes Monthly.”

Typically, it is difficult to measure the impact of falling prices on profits in the nonmanufacturing sector. Taking the diffusion index on prices as an indicator of actual output andinput prices, however, the relative decline in sales prices as compared with purchase prices has
Development Bank of Japan Research Report/ No. 19 33

become sharper in non-manufacturing than in manufacturing, implying a harsh profit
environment for non-manufacturers (Figure 2-16).
Figure 2-16. Trend of Diffusion Index on Sales Prices and Purchase Prices by Industrial
Sector (All sizes of corporations)
Manufacturing

40
30

DI on sales - purchase prices
DI on sales prices
DI on purchase prices

20

Non-manufacturing

40

DI on sales - purchase prices
DI on sales prices
DI on purchase prices

30
20

10

10

0

0

-10

-10

-20

-20

-30

-30
-40

-40
90

91

92

93

94

95

96

97

98

99

00

01

(CY quarterly basis)

Source:Bank of Japan, “Tankan.”

90

91

92

93

94

95

96

97

98

99

00

01

(CY quarterly basis)

7. Real Interest Rates Remain High, Corporate Debt Repayment Burden Still Growing
The interest costs considered by firms in making decisions on plant and equipment investment
are real interest rates, i.e. nominal interest rates adjusted for price fluctuations (and accompanying
changes in the value of money) expected in the future. Since nominal interest rates cannot belower than zero (the constraint of non-negativity), real interest rates will remain high when
expected price inflation is negative, possibly curbing plant and equipment investment. This isconsidered as one of the costs of deflation.
The expected price inflation for manufacturers, which was estimated with the CarlsonPerkin method14 using the diffusion index on sales prices (prospect for the next three months) of
BOJ’s Tankan and actual output price inflation data, was found to be negative for a long periodof time since around 1992 (Figure 2-17). Thus, businesses expected a sales price decline of 1.5%in the first half of 1999, and were still anticipating a drop of over 1% in the most recent period.
On the other hand, interest rates on new loans for firms have almost bottomed out, as shortterm interest rates have reached for zero bounds. According to an estimate using the expected
price inflation, real interest rates have remained at around 3% (Figure 2-18). This level is not low
in light of the potential growth rate of the Japanese economy,15 which is considered to be justbelow 2% or around 1%.
The increase in real repayment burden for existing debts is another cost of deflation related
to corporate finance. Of course, an economically rational firm should account for pricefluctuations expected at the time of contracting debts in the form of real interest rates. However,
14

The Carlson-Perkin method is a technique that estimates the average and standard deviation of the forecast values of the
population regarding a variable, from survey data on the future direction of the variable, such as BOJ’s Tankan. Various
calculation methods exist according to the supposition concerning the distribution of the population and the formation of
expectation. The formula adopted here is based on Nakayama and Oshima (1999), “Infure Kitai no Keisei ni tsuite (On theFormation of Expected Inflation),” Working Paper 99-7, BOJ Research and Statistics Bureau.
15
No definite estimates exist for the potential growth rate, as different models and suppositions lead to different results. In BOJ
Research and Statistics Bureau (2000), “Waga Kuni no Bukka Doko – 90-nendai no Keiken wo Chushin ni (Trends in Prices
in Japan: With Focus on the 1990s),” Bank of Japan Research Monthly, October 2000, the potential growth rate was estimated tobe just under 2% when using a traditional approach, and about 1% when considering the operating rate in the nonmanufacturing sector, etc.
34 Development Bank of Japan Research Report/ No. 19

any unexpected price fluctuation is recognized as an additional debt burden.16 The impact is more
serious on firms with heavier debt burden in relation to their profitability, which is the source ofmoney for debt repayment.
Figure 2-17. Measurement of Expected
Output Price Inflation Based on Forecastof Diffusion Index on Manufacturing Sales
Prices for Next Period
6

1.5
Manufacturing output price inflation (actual,annual % change from previous period)
Expected output price inflation (annual % change
from previous period, right scale)

4
2

1.0

Figure 2-18. Trends in Real Interest
Rates Based on Expected Output Price
Inflation
9
7

0.5

6

0

0.0

5

-2

-0.5

-4

-1.0

2

-6

-1.5

1

-2.0

0

(CY quarterly basis)-8
90 91 92
Notes:
Sources:

93 94 95

96 97 98

99 00 01

1. Adjusted for consumption tax change.
2. Measurement is based on the Carlson-Perkinmethod.
Bank of Japan, “Tankan” and “Price Indexes
Monthly.”

Nominal interest rates
Real interest rates

84
3(CY quarterly basis)

90
Note:

Sources:

91

92

93

94

95

96

97

98

99

00

01

1. Nominal interest rates represent the averagecontracted interest rates on new loans anddiscounts of domestically licensed banks (total)
2. Real interest rates were calculated from theexpected output price inflation in Figure 2-17.
Bank of Japan, “Financial and Economic Statistics
Monthly,” etc.

According to the Statistical Survey of Incorporated Enterprises, corporate debt redemption
years (the weight of debt burden in relation to the flow of money for repayment) have tended toincrease since around 1990 for both manufacturers and non-manufacturers. The period wasparticularly long in fiscal 1998 and 1999, primarily due to the recognition of extraordinary losses17(Figure 2-19). By industry and by corporate size, the impact of increased real debt burden due todeflation seems to be particularly severe for construction, wholesale/retail, real estate and smallsized firms with longer redemption periods (Figure 2-20).

16

If the expectation on price inflation is uniform, the unexpected change only represents a redistribution of income fromdebtors to creditors from the viewpoint of the economy as a whole. Nonetheless, a downward pressure on the economy issupposed to arise from the difference in the propensity to spend between debtors and creditors (higher for the former).
17
The period was longest since fiscal 1980 after adjustment for the impact of the introduction of tax effect accounting (for all
firms in all industries).
Development Bank of Japan Research Report/ No. 19 35

Figure 2-19. Trends in Corporate Debt Redemption Years
Corporations of all sizes by industry

20

All industries by size of corporation

25
20

15

15

10

10

5

5

(FY)

0

(FY)

0
80

82

84

86

88

90

92

94

96

98

80

All industries
All industries (after adjustment for tax effect accounting)
ManufacturingNon-manufacturing

82

84

86

88

90

92

94

96

98

Corporations of all sizes
Corporations of all sizes (after adjustment for tax effect accounting)Large-sized firms
Medium-sized firms
Small-sized firms

Figure 2-20. Trends in Corporate Debt Redemption Years
Manufacturing average
Foods
Chemicals
Iron & steel

6.0
5.1
3.3
10.2

General machinery

10.4

Electric machineryTransport equipment

4.2
4.7

Non-manufacturing average
Construction
Wholesale/retail
Real estateTransport &telecommunications
Electricity
Services

11.6
23.4
17.5
44.3

Average for all industries and corporations of all sizes
Ditto (after adjustment for tax effect)

9.6
14.7

Large-sized firms

6.7

Medium-sized firms

7.2
6.5

8.1
6.1

Small-sized firms

15.0(For Figures 2-19 - 2-20)
Note:
Debt redemption years ≡(corporate bonds + long-term loans)/(gains or losses after tax – dividends & bonuses +depreciation). As gains or losses after tax have been inflated since fiscal 1998 due to the introduction of financial
instrument accounting, estimates based on the conventional method are presented for all industries and corporationsof all sizes, for which relevant data are available.
Source:Ministry of Finance, “Quarterly Report of Statistical Survey of Incorporated Enterprises.”

8. Financial Assets Increasing in Parallel with Liabilities while Real Assets Decrease
In addition to falling prices, the decline in asset values also has a considerable impact on theeconomy. The drop in share and land prices since the collapse of the bubble economy inparticular not only acted as a negative wealth effect that curbed consumption but also seems tohave suppressed corporate plant and equipment investment by reducing collateral values. Thissection reviews the trend of assets prices until recently and the resultant change in, and impact on,
asset values.
Share prices dropped to the lowest level since the collapse of the bubble economy in fiscal
1998, recovered temporarily in fiscal 2000, but fell again in fiscal 2000 (Figure 2-21).
Subsequently, they recovered slightly in March 2001, only to resume the previous level in May.
Land prices declined gradually after peaking in the first half of fiscal 1991, and continued to fallin the late 1990s, albeit at a slower pace (Figure 2-22). They are still falling as a whole, despite
signs of bottoming out.

36 Development Bank of Japan Research Report/ No. 19

Figure 2-21. Trends in Share Price IndicesFigure 2-22. Trends in Land Prices

(¥)
40000

3000

120

2500

100

2000

80

1500

60

1000

40

500

20

0

0

(index)Nikkei 225 average share price
TOPIX (right scale), January 4, 1968 = 100

35000
30000
25000
20000
15000

Residential area
Industrial area
Commercial area

10000
5000

(CY quarterly basis)

0
90 91

Note:
Sources:

92 93 94 95

96 97 98 99
st

00 01

Data for Tokyo Stock Exchange 1 Section.
“TSE Monthly” and “Nihon Keizai Shimbun.”(FY semiannual basis)
90

Note:
Source:

91

92

93

94

95

96

97

98

99

00

Indexed on the end of fiscal 1989 = 100.
Japan Real Estate Institute, “Urban Land Price
Index.”

Reflecting such trends in asset prices, stocks continued to bring capital gains until 1998.
However, most of the huge capital gains generated in 1999 were lost in 2000, seriously affecting
financial institutions and incorporated enterprises in particular (Figure 2-23). Meanwhile, land
continued to generate capital losses (Figure 2-24). This trend apparently continued into 2000 and
onward. Capital losses, though not always on the financial statement explicitly, are at least
recognized as unrealized losses. The consequent reduction in the value of shares held isconsidered to restrict consumption in the household sector and investment in the corporate
sector.
Thus, share prices have experienced ups and downs, usually in parallel with the economic
cycle. Although the wide fluctuation of share prices is still a disturbing factor for the economy,
share prices themselves are now unlikely to become the center of economic fluctuation as theirlevel has already consolidated significantly. In contrast, the sustained decline in land prices
continues to exert downward pressure on the economy. It is not easy to estimate the reasonable
market value of land. Considering the fact that land prices continue to fall, however, values areprobably higher than the present discount value of available profits.
The burden of repaying housing loans in the household sector and bank loans in thecorporate sector puts pressure on cash income, as it does not fall in proportion to the decline inasset values and prices. Although nominal interest rates remain low, real interest rates have notfallen substantially due to deflation (see Section 6 and Figure 2-18).
As regards the trend of asset values nationwide, financial assets have been growing year afteryear, but most of the growth is accompanied by a matching increase in liabilities (Figure 2-25).
Although the greater presence of financial markets has a considerable impact, it has not led toany substantial increase in the wealth of the economy as a whole. The net assets of a country are
the sum of real assets and external net assets, which are net financial assets (financial assets minus
financial liabilities). Of the two components, external net assets increased in the 1990s thanks to
the growth of the current account surplus, but have decreased to some ¥85 trillion. Net assets as
a whole decreased by ¥564 trillion from the end of 1990 to the end of 1999, reflecting thedecline in real assets due to falling land prices (Figure 2-26).

Development Bank of Japan Research Report/ No. 19 37

Figure 2-23. Capital Gains or Losses on Stock Figure 2-24. Capital Losses on Land(¥ trillion)(¥ trillion)

200
150
100

50

(data forreference)

Financial institutions
Households
Non-financial corporations

0

50

-50

0

-100

-50

Financial institutions
Households
Non-financial corporations

-150

-100

(CY)

-150
91 92 93 94 95 96 97 98 99
Note:

(CY)

-200
91

99 00

92

93

94

95

96

97

98

99

1. Based on 93 SNA, and covers revaluation accounts in the adjustment accounts.
2. Data for reference are developed according to the adjustment table of Bank of Japan, “Money Flow Accounts,” and covers
listed and over-the-counter shares only. (Annual Report on National Accounts also includes the market values of privatelyowned company shares.)Cabinet Office, “Annual Report on National Accounts.”

Source:Figure 2-25. Trends in Financial Assets andLiabilities

Figure 2-26. Trends in Real Assets andNational Wealth(¥ trillion)(¥ trillion)

4000

6000

600

5000

500

4000

400

2500

300

2000
1500

200

1000

Financial assets
Financial liabilities
Net financial assets (right scale)

3000
2000

(CY)

1000

100

3500
3000

Real assets
Net assets (national wealth)

500

(CY)

0
0

0
90

Note:
Source:

91

92

93

94

95

96

97

98

99

90

91

92

93

94

95

96

97

98

99

Based on 93 SNA.
Cabinet Office, “Annual Report on National Accounts.”

9. Increased Government Debt Burden and Mounting Concerns about the FutureWith the implementation of successive economic stimulus measures, the budget deficits of thecentral and local governments piled up throughout the 1990s. The budget balance of the general
government sector (as a percentage of GDP) went into the red in fiscal 1992 mainly due to thegrowing deficit of the central government. The balance worsened each year until fiscal 1996,
when it dropped to –4.7%. After a slight recovery to –3.8% in fiscal 1997, it dropped further to–
7.4% in fiscal 1998 (-6.3% for fiscal 1998 excluding the part of National Rail’s long term debts
and accumulated debts for national forests and fields transferred to the general account). The
budget deficit seems to have increased even further in fiscal 2000 (Figure 2-27).
Following the trend of budget deficit, the sum of the outstanding long-term debts of thecentral and local governments increased rapidly in the 1990s. It exceeded the level of GDP in thelate 1990s and is now slated to reach ¥666 trillion at the end of fiscal 2001, which is equivalent to128.5% of GDP. The debt burden is growing heavier as budget deficits continue (Figure 2-28).
38 Development Bank of Japan Research Report/ No. 19

Figure 2-27. Budget Balance of General
Government (As % of GDP)

Figure 2-28. Long-term Debts of Central
and Local Governments(%)(¥ trillion)

4
2
0
-2
-4
-6
-8
-10
-12
-14

End FY 1990 End FY 1995 End FY 2000 End FY 2001
Total for central
and local
governments

266

410

642

666

As % of GDP

60.6%

83.7%

125.0%

128.5%

Note:
Source:(CY)

After supplementary budget for FY 2000. Draft
budget for FY 2001.
Ministry of Finance Data.

90 91 92 93 94 95 96 97 98 99 00 01
Central government
Social welfare fundNote:
Sources:

Local governments
Total

Data for fiscal 2000 and 2001 are forecasts, exceptthat no data are available for social welfare fund.
Cabinet Office, “Annual Report on National
Accounts;” Ministry of Finance data.

As regards public finance, the Fiscal System Council conducted an “Opinion Poll on Public
Finance” from late March to April 2001. Asked if they are concerned about the future based on
the current state of public finance, 86% of the respondents answered that they were very
concerned, and 11% somewhat concerned. Thus, 97% of the respondents were concerned about
the future (Figure 2-29).
Judging from various questionnaire surveys, concerns about public finance, pension plansand provisions for post-retirement increased in the late 1990s, when it became apparent thatprices were steadily declining (deflation). Thus, deflation may have had a non-negligible impact
on consumer confidence.
Figure 2-29. Concerns about Future Public Finance
Slightly
concerned
11%

Note:
Source:Survey conducted between March 27 andApril 17 with 1,230 respondents.
Fiscal System Council, “Questionnaire
Result of Opinion Poll on Public
Finance.”

Littleconcerned2%

Not concerned at
all 1%

Very
concerned
86%

Development Bank of Japan Research Report/ No. 19 39

Figure 2-30 shows the result of an opinion poll on life after retirement conducted by the Ministryof Posts and Telecommunications (the current Ministry of Public Management, Home Affairs, Posts
and Telecommunications), which covers households including at least two spouses and headed bythose aged between 30 and 50 (4,800 households). The survey indicates that the respondents weremost concerned about receiving public pension benefits after retirement as of 1999 (survey
conducted in January 2000). The fact that the percentage of this response increased substantially fromthe same survey conducted in 1990 shows that fears about pension plans are growing.
Figure 2-30. Contents of Concerns about Post-retirement (Multiple answers)
Reception of public pension, corporate
pension and retirement benefits (asexpected)
Depletion or insufficiency of provisions
such as deposits and savings expenses
Necessity of nursing care in old age
Depletion of income, etc. due to priceinflation

1990
1993

Inability to work

1996

Financial predicament due to rising
medical expenses

1999
0

Source:

10

20

30

40

50

60

70

Ministry of Public Management, Home Affairs, Posts and Telecommunications, “FY 1999 Market Survey
on Personal Pensions.”

80

90
(%)

Figure 2-31 shows the Consumer Confidence Index (CCI) of the Cabinet Office as well as
the Consumers’ Sentiment Index (CSI) of the Japan Research Institute, which indicates theoverall condition of consumer confidence. The CCI18 improved until September 2000 but fellsince December to the level of the previous economic trough as “willingness to buy durable
goods” deteriorated mainly due to the Recycling Law, which took effect in March 2001. On theother hand, the CSI19 is an indicator based on an opinion poll concerning the living standard in
the coming year. It should be noted first that the future outlook deteriorated almost constantly
throughout the 1990s. After peaking in 1998 with successive bankruptcies of financial institutions,the index improved slightly in the economic recovery since 1999. However, it has been
deteriorating again since late 2000 in parallel with the consumer confidence index. Thus, therising concerns about post-retirement life, along with uncertainties about public finance, pension
plans, income and employment conditions have had a considerable impact on consumer
confidence.

18

The CCI is derived from five surveys; overall livelihood, income growth, price, employment and willingness to buy durable
goods. For each survey item, a consumer confidence indicator is developed as the weighted average of points assigned toindividual answers according to their impact on consumption for the next six months. Thus, +1 point is given to the answer“will improve,” +0.75 to “will slightly improve,” +0.5 to “will not change,” +0.25 to “will deteriorate slightly” and 0 to “willdeteriorate.” The CCI is the simple average of the five indicators. The index may vary from 0 to 100. See Figure 1-15 forrecent results of each survey component.
19
2, 1, -1 and –2 points are given to the answers “will deteriorate,” “will deteriorate slightly,” “will improve slightly” and “willimprove” respectively. Add unity to this weighted average and multiply by a hundred. The index may vary from –100 to 300.
The larger the value, the lower the expected living standard in the coming year.
40 Development Bank of Japan Research Report/ No. 19

Figure 2-31. Trends in Indices on Future Concerns and Consumption Environment
160

55

140

50

120

45

100

40
生活不安度指数
Living insecurity index
消費者態度指数（右目盛）Consumer confidence index (right scale)

80

35
(CY)

60
90

Sources:

91

92

93

94

95

96

97

98

99

00

Cabinet Office, “Consumer Confidence Survey;” Japan Research Institute, “Consumer Centiment Indiex.”(as of June 25, 2001)[by Economic Research Group (e-mail: report@dbj.go.jp)]

Development Bank of Japan Research Report/ No. 19 41

01

30

List of Back Numbers (Including JDB Research Report)
No. 19 Recent Trends in the Japanese Economy: The Japanese Economy under Deflation (This Issue)
No. 18 Introduction of a Home Appliance Recycling System: Effects & Prospects: Progress towards Utilisation of
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 Expansion of
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

Emipirical Reassessment of Japanese Corporate Investment Behavior: Features and Changes since the1980s, based on Micro-level Panel Data (This issue)

No.11

Survey on Planned Capital Spending for Fiscal Year 1999, 2000 and 2001, October 2000

No.10

Job Creation and Job Destruction in Japan, 1978-1998: An Empirical Analysis Based on Enterprise Data,
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, the Debt
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.90Recent 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 Japanand 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 Acceptance isEssential, May 1998

No.81

The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1996, 1997 and 1998
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 andEnvironmental 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 Datefrom 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 FY 1995, 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 and 1996
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 FY 1994, July 1995
No. 48 Strategies for Improving the Efficiency of the Japanese Physical Distribution System: Part2, 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 and 1995
Conducted in August 1994 , November 1994
No. 40 Selected Summaries of Research Reports Published in FY 1993, 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 and 1994
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 and 1993
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 and 1992
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 and 1991
Conducted in August1990,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 and 1990
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 and1989 Conducted in February 1989, March 1989
No. 13 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1987, 1988 and 1989
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