Japans econimic Policy

A detailed Summary of Japans econimic Policy

The Current Economy and Medium-Term Growth Prospects Summer 1999 brought several indications that the recovery is slowly starting to gather momentum. Public investment, the zero interest rate policy, and an easy lending stance backed by government credit guarantees has clearly had an effect. Full-scale private sector restructuring has also helped put corporate profits back on an uptrend and this is having a major macroeconomic impact. The authorities have recognized that the rejuvenation of industry at the microeconomic level is necessary for revitalization at the macroeconomic level, which has led them to combine traditional demand stimulus policies with efforts to make business more competitive through, for example, the Law on Special Measures for Industrial Revitalization. But when will the economy start to recover under its own steam and what is the medium-term growth trajectory? Under given conditions, we would expect real GDP to grow at 0.9% in FY99, increasing to 1.9% in FY00 as the economy enters a self-sustained growth path. We would also expect actual growth to exceed the potential rate of growth fromFY01 onwards. These conditions relate to the policy measures that would need to be implementedwithin a macroeconomic con

text of ongoing structural reform designed torevitalize Japanese industry. Our medium-term forecast is based on the assumption that the authorities will give priority to self-sustaining economic recovery and maintain their ultra-easy monetary policy stance at least through 2000. The zero interest rate policy is not a necessary condition for economic recovery but until such time as private demand takes over from public demand, and most particularly until such time as private capex starts to pick up in earnest, we expect the ultra-easy monetary stance to be maintained. We assume the government will not reassign priority away from economic recovery back to its fiscal consolidation program for the time being, although the restructuring of public finances is likely to become a major political theme once the recovery gets fully under way. Under these conditions, we expect capex to start to expand again in FY00 and to drive economic growth in the medium term. However, given the deflationary gap between potential and actual growth, unemployment is expected to remain close to 5% for some time yet, falling only gradually over time. Slow job growth is thus likely to cause the economic recovery in 2000 to be a 'jobless recovery'. Thereafter, unemployment will start to decline gradually but will probably remain in the 4% range -- high by Japanese standards -- due to a higher labor participation rate and the continuing mismatch between the supply and demand for labor. It seems the economy would have to grow more quickly than is predicted in the current forecast if unemployment is to be further reduced. From a different standpoint, however, the continued labor market adjust

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