With respect to the trend in Japan's trade volume since 1990, both imports and exports were weak until 1993, but then growth began to speed up. In particular, while the imports from the US and EU remained more or less flat, imports from Asia (excluding China) experienced an increase, and those from China saw a remarkable increase. The imports from China, for example, exceeded those from the EU in 1999, and from the US in 2002, making China Japan's largest importer (Figure 15). This is partly as a result of the horizontal or vertical division of trade in Japanese corporations in the form of an operational shift to China, where labour and other operational costs are relatively lower. The fundamental backdrop for such an increase in imports from China reflects the recent robust economic growth of this country.

## (Changes in Domestic Economy)

Given that improved business performance had a positive effect on households, the Japanese economy appeared to recover slowly throughout 2004. According to MOF "Financial Statements Statistics of Corporations by Industries Quarterly", the corporate sector reported a record profit and the economic recovery seemed likely to become a steady recovery after bursting of the bubble economy.

The MIC Statistics Bureau's "Family Income and Expenditure Survey" indicates that during the period of sluggish economy in the 1990s, reflected in household spending, spending on transport and communications increased with the development of an information-oriented society. As the population ages, spending on medical care increases, while spending on food, clothing, and shoes decreases (Figure 16).

With respect to distribution of industry in real GDP growth terms during the same period, the contribution to GDP growth of some sectors, including construction, decreased due to cuts in public projects, while the contribution made by services and financial and insurance industries increased because of expansion in the tertiary industry. Given this background, the "Population Census" conducted by the Statistics Bureau of MIC shows that, in the shift of worker distribution by industry during the 1990s, the number of workers in primary industries (e.g. agriculture, forestry, and fisheries) decreased to a large extent, whereas, among the secondary industries (e.g. mining, construction, and manufacturing), the number of workers in the mining sector decreased significantly while those in manufacturing continued to drop throughout the 1990s. In the first half of the 1990s, the number of workers in the construction sector expanded, although in the latter half of the same decade, it began to fall, resulting in the reduction of numbers in the secondary industries as a whole. Tertiary industries, e.g. wholesale and retail trades, restaurants, and financial and insurance sectors saw some decrease in the first half of the 1990s. In the latter half of the same decade, these sectors again experienced some level of decrease. Overall, however, the expansion of the service industries supported a continuous rise in the number of workers in the tertiary industries throughout the 1990s (Figure 17).

During the 1990s, the Japanese market received strong foreign inflows of capital. Before this period, Japanese stocks were mainly cross-held or held by institutional investors. However, this trend has been changing and, since around 1990, foreign equity flows into Japan, both from foreign business and individual investors, have expanded.

## (Japan's Challenges for Sustainable Growth)

As the recent economic trends clearly show, it is essential for Japan to stimulate the economy in order to achieve an enhanced economy based on a sustainable economic growth. This can be achieved by strengthening its global competitiveness, acquiring creative value-added skills, and by applying the outcome of such efforts to improving employment and worker's households. The important issues to be addressed include: population decrease, population aging and declining birthrate, globalization, and sophistication of the industrial structure. Of these challenges, perhaps the most critical to be dealt with is the declining birthrate and the growing proportion of elderly people.