bank of japan ’ s may review of monetary and economic trends in japan bank of japan, monthly economic review, 20 / 5 / 97. japan ’ s economy continues on a moderate recovery trend despite some fluctuations caused by the rise in the consumption tax rate, with private demand showing underlying firmness. with respect to final demand, public - sector investment has decreased, and housing investment has declined, reflecting the reversal in the stepped - up demand which took place ahead of the rise in the consumption tax rate. however, net exports have continued to rise and business fixed investment is increasing steadily. despite the reversal in the stepped - up demand caused by the consumption tax rate hike, the recovery in personal consumption has not been hindered, given the moderate but firm recovery in labor market conditions and income formation. in these circumstances, industrial production has been firm to recover the level of inventories which declined owing to the temporary surge in demand ahead of the rise in the consumption tax rate. meanwhile, prices have stopped declining, and growth in monetary aggregates has continued at around 3. 0 per cent. with regard to personal consumption, outlays for travel have continued to increase moderately. with respect to goods, sales particularly in expensive goods surged in march 1997 ahead of the rise in the consumption tax rate, followed by a decline in april as its reaction. passenger - car sales recorded buoyant two - digit growth year - to - year for six consecutive months between october 1996 and march 1997, but showed a two - digit decline year - to - year in april. although sales of electrical appliances, as well as sales at department stores and supermarkets, rose significantly in march 1997, april figures available for department stores in tokyo are significantly below the previous year ’ s level. however, the recovery trend in personal consumption do not seem to have been hindered, as labor market conditions as well as household income formation are improving steadily, albeit moderately. among leading indicators of business fixed investment, machinery orders have increased steadily. construction floor area has also continued to recover moderately. with respect to housing investment, housing starts in terms of the seasonally - adjusted annual rate reached a significantly high level in the fourth quarter 1996, partly reflecting the stepped - up demand ahead of the rise in the consumption tax rate. later, they declined as the surge in demand reversed. regarding public - sector investment, the amount of public works contracted has quite recently picked up somewhat, reflecting orders included in the supplementary budget for fiscal 1996. however, public - sector

significant changes in the environment that evolved since the 1990s. the two changes in the environment were, first the intensification of global competition and second, the demographic vortex. the first change, the intensification of global competition, started to advance from around the end of the 1980s. in the high - speed growth era, japan had no formidable rivals among industrial countries except for the united states and european countries. therefore, japanese firms introduced advanced technologies in the united states and europe and then implemented a competition strategy in which they increased exports of low - priced, highquality standardized industrial products with relatively inexpensive capital and labor. that was an optimal strategy at that time. however, amid the rapid progress in the globalization of a market economy, such as china ’ s and other emerging economies ’ entry as peers of a market economy, and the striking development of the information and telecommunication technology, the global economy entered the era of so - called mega competition. the environment changed so that competition to reduce capital and labor costs became severe, and at the same time, firms around the world had to compete fiercely seeking for earning opportunities by utilizing it technologies. it has become difficult for a firm to enjoy high profits unless it uncovered a new business area ahead of other firms around the world and allocated management resources such as personnel and capital promptly and intensively to such new business area. it exactly became an era when selecting and concentrating resources in key strategic areas have increasingly been required. the second change in the environment is the demographic vortex. japan ’ s working - age population, namely, the population aged between 15 to 64, started to decline in the mid1990s, and the total population peaked in 2007. that exactly shows that population aging is rapidly progressing. the rate of the elderly population aged over 65 to the total population was 9 percent in 1980 and more than doubled in 2009 to 23 percent. if the trend continues, the ratio of the elderly population is projected to rise to nearly 40 percent in 2050. population aging will hamper growth from the supply side of the economy in that it will bring a shortage of workers. to address that issue, it is necessary to make further efforts to increase female labor market participation and accept foreign workers. at the same time, population aging will have a large impact on the demand side of the economy ; for example, it will bring a substantial shift in the components of consumer demand. specifically, there is a possibility that demand for homes, cars, and eating out will decrease, while