Japanese Economy in 2006 and Beyond: Despite Slow Growth, Record Postwar Expansion Achieved

06-ERC
70L-001AA
17

Japanese Economy in 2006 and Beyond:
Despite Slow Growth, Record Postwar Expansion Achieved

February 2007
Japanese Economy Division,
Economic Research Department
JETRO


Contents

Overview .....................................................................................................................................................i
1. General Indicators: Longest Economic Expansion in Postwar Japan ............................................. 1
A. Corporate Activity Robust, Although Growth Slows in 2006 Second Half ....................................... 1
B. Characteristics of Current Economic Growth .................................................................................... 4
C. Issues and Outlook for Japanese Economy ........................................................................................ 5
2. Trade and Direct Investment: Ties with Emerging Markets Deepen............................................. 13
A. Exports and Imports Reach High Levels.......................................................................................... 13
B. Trade Trends by Geographic Area (Jan.–Nov.) ................................................................................ 13
C. Trade by Product .............................................................................................................................. 16
D. International Trade Balance ............................................................................................................. 20
E. Expectations for 2007....................................................................................................................... 20
F. Foreign Direct Investment ................................................................................................................ 21
3. Production: Mining and Manufacturing Output Remain High ..................................................... 27
A. Expansion Continues Despite Uneven Pace..................................................................................... 27
B. Rising Inventories in Electronic Components and Devices ............................................................. 31
C. Mild Growth to Continue in 2007 .................................................................................................... 32

4. Corporate Sector: Capital Expenditure Plans Still Solid ................................................................ 33
A. Corporate Earnings Continue Growing............................................................................................ 33
B. Capital Expenditure Maintains Steady Growth ................................................................................ 35
C. Slower but Sustained Growth in 2007.............................................................................................. 38
5. Employment: Wages Stagnant but Employment Improves ............................................................ 42
A. Employment and Wage Trends in 2006 ........................................................................................... 42
B. Gearing Up For Mass Retirements by Baby Boomers ..................................................................... 45
C. Outlook for 2007 .............................................................................................................................. 47
6. Personal Consumption: Spending Remains at a Standstill ............................................................. 50
A. Trends in 2006.................................................................................................................................. 50
B. Growing Expectations for Spending by Baby Boomers................................................................... 53
C. Outlook for 2007 .............................................................................................................................. 54


7. Prices: End to Deflation Put on Hold ................................................................................................ 57
A. Consumer Prices Maintain Slight Upward Movement .................................................................... 57
B. Corporate Goods Prices Peak ........................................................................................................... 58
C. Outlook for 2007: End of Deflation ................................................................................................. 59
8. Finance: Financial Environment Returns to Normality.................................................................. 62
A. BOJ Tightens Money Policy ............................................................................................................ 62
B. Demand for Funds Recovers, albeit Slowly ..................................................................................... 64
C. Banking Industry Trends .................................................................................................................. 68
D. Stock, Securities and Foreign Exchange .......................................................................................... 70
E. Increased Polarization of Real Estate Market................................................................................... 73
F. Key Points to Watch.......................................................................................................................... 74

Columns

Column 1 .................................................................................................................................................. 11
Column 2 .................................................................................................................................................. 17

Column 3 .................................................................................................................................................. 26
Column 4 .................................................................................................................................................. 40
Column 5 .................................................................................................................................................. 49
Column 6 .................................................................................................................................................. 56
Column 7 .................................................................................................................................................. 61
Column 8 .................................................................................................................................................. 67
Column 9 .................................................................................................................................................. 75


Overview
1. General Indicators: Japan's Longest Economic Expansion in the Postwar Period
The Japanese economy achieved high growth rates in 2006, particularly in the corporate sector in
the first half of the year. The middle of 2006 brought a slowdown, especially in consumer spending. In
general, however, corporate performance held steady, labor supply was tight and the economy overall
did not slow significantly. The economic growth phase that began in January 2002 is virtually certain to
be statistically verified as having marked its 58th consecutive month in November 2006, making it the
longest period of growth in postwar Japan. Although favorable results have been seen in the corporate
sector, there was only mild improvement in wages and consumer spending, so the pace of recovery was
slower than in previous phases of growth.
The United States economy is forecast to slow down in 2007. Meanwhile, Japanese companies
remain reluctant to increase wages, so the Japanese economy is also expected to lose momentum. The
labor supply will tighten as baby boomers retire en masse. It is unlikely that the economic recovery will
stall due to slowed consumer spending. Stable economic growth is expected, although actual results
could be hurt by a potential downturn in the United States economy, crude oil prices rising again, an
increase in the fiscal deficit or political events that could negatively affect consumer confidence.

2. Trade and Direct Investment: Deeper Ties with Emerging Markets
Exports increased thanks to a weaker yen and favorable conditions in the global economy. Imports
also expanded as the Japanese economy recovered and crude oil import prices stayed high. Despite
potential risks, conditions remain favorable in China and the rest of East Asia, which together accounted

for 45.7% of total Japanese exports. Exports to this region should remain brisk in 2007. Crude oil prices
appear to have stabilized since October 2006, so import growth is expected to decline.
Foreign direct investment in January to September 2006 confirmed that investment in China
continued to slow down, as in 2005. Japanese corporations, aware of the risks of intellectual property
rights violations in China, partly shifted operations to the emerging markets of India, Russia and
Vietnam. Outward M&A included several megadeals as Japanese corporations sought to expand their
core businesses. Inbound FDI was boosted by major increases in funding, resulting in the largest net
outflow since such statistics were first complied in 1996.

3. Production: Mining and Manufacturing Production Sustains High Levels
Mining and manufacturing output maintained an overall upward trend in 2006, sustained by a steady
recovery in the materials industries. Robust increases in both internal and external demand for products
such as transport equipment and electronic components and devices led to high growth in shipments
overall, although trends varied among industries. Stock buildups of certain key products, such as mobile
phones and game equipment in the electronic components and devices industry, put sporadic pressure on
the mining and manufacturing sector to reduce inventories. But the buildups were considered transitory,
so mining and manufacturing is forecast to enjoy moderate growth sustained by brisk internal and
external demand in 2007.

i


4. Corporate Sector: Appetite for Capital Investment Remains Healthy
Corporate profits continued growing, buoyed by an economic climate of high production and
stabilized oil prices. Increased profits were seen across a wide range of industries and firms (in terms of
company size), which helped to boost capital investment. The scope of capital investment expanded due
to efforts to raise global competitiveness, centering on processing industries, and the elimination of
perceived overcapacity among even small and midsized enterprises. Capital investment could see a
reactionary decline in 2007, but it is still expected to continue growing because of new overseas demand
being developed by Japanese companies seeking to reinforce their revenue bases.

5. Employment: Wages Stagnant but Employment Improves
Employment improved in 2006 as the labor supply tightened due to the start of mass retirements by
baby boomers and corporate performance rose steadily. Corporate performance is forecast to remain firm,
which would help to fuel a moderate improvement in employment. However, with non-regular workers
now accounting for 30% of all employees, this could lead to new problems in the labor market, including
broader inequalities in incomes.
Wages tended to remain static in 2006. Earnings were not passed along to employees due to
corporate reluctance to increase wages. A tightening labor supply, however, is exerting upward pressure
on wages, which are expected to increase moderately in 2007.

6. Personal Consumption: Spending Remains at a Standstill
Personal consumption (consumer spending) was stagnant in 2006, influenced by factors such as a
long rainy season and sluggish sales of winter clothing due to unusually warm weather. Spending was
hampered by sluggish wage increases. Although consumers remain uncertain about prospects due to the
scheduled elimination of tax breaks and increases in their social security burden, wages are expected to
rise as the labor supply continues to tighten. This, along with retirement payments to baby boomers
retiring en masse, should stimulate a moderate increase in personal consumption in 2007.

7. Prices: Move out of Deflation Comes to Standstill
Consumer prices turned moderately upward in 2006. However, statistical revisions to key indices
and increasingly severe price competition in digital products negated any clear upward trend in prices, so
the government did not officially declare an end to Japan’s chronic deflation. But these special factors
notwithstanding, the elimination of domestic oversupply and, on the demand side, personal consumption
will be pushed upward by moderate wage increases. As a result, the demand/supply gap is expected to
tighten and prices are likely to experience upward pressure in 2007.

8. Finance: Financial Environment Improves
The Bank of Japan lifted its easy money policy for the first time in five years in March 2006, and
then ended Japan’s era of ultra-low interest rates by raising its bank lending rate in July. Although further

increases were expected during the year, they were postponed until January 2007. The impact of the
BoJ’s tightened money policy was limited to commercial and home loans. Going forward, however,
intensified upward pressure on rates should affect households and companies, and beyond them
government finances. The financial climate moved steadily toward normality, particularly in banking
where non-performing loans were largely eliminated. The BoJ’s timing for additional rate increases must

ii


be watched, as a distinctly tighter stance is envisioned in the latter half of 2007, when the Japanese and
U.S. economies are expected to show clear signs of stable growth and rising prices.

iii


1. General Indicators: Longest Economic Expansion in Postwar Japan
A. Corporate Activity Robust, Although Growth Slows in 2006 Second Half
The Japanese economy enjoyed stable growth led by capital expenditure in 2006. The underlying
positive tone of 2005 extended into first half of the year, with high growth primarily in the corporate
sector. From midyear, however, the economy began to slow, particularly in consumer spending.
The GDP rose more than two percent in the first quarter, propelled by consumer spending, capital
expenditure and other segments of the private sector. In the second quarter, growth slowed to 0.3% over
the previous quarter (1.1% annualized) due to weakened demand from the public sector and efforts to cut
inventories. Although the GDP in the third quarter was up just 0.2% (0.8% annualized), it was the
seventh consecutive quarter of positive growth, so the economy continued to avoid any significant
decline (figs. 1-1 & 1-2). Consumer spending turned pessimistic and declined 0.9% from the second
quarter. The decline, although due to temporary factors such as inclement weather, also reflected the fact
that improved jobs and stronger corporate results had not translated into increased incomes because
companies kept a lid on personnel costs. Capital expenditure grew 1.5%. The third-quarter GDP was also
supported by external demand as exports to the U.S. and East Asia rose. Imports were sluggish.

After years of chronic deflation, the consumer price index (excluding fresh foods, 2000
[pre-revision] baseline) rose 0.5% year on year in January, which followed 0.1% growth in each of the
two previous months. Thereafter, the index grew throughout much of the year, but the GDP deflator and
special factors influencing CPI growth remained negative, so the government did not officially announce
the end of deflation (Fig. 1-3).
Fig. 1-1

Contributions to GDP Growth by Calendar Year and Quarter

Calendar Year (% YoY)
8.0
6.0
4.0
2.0

Quarter

6.8
5.1
3.8
3.0

Other
(annual rate, % QoQ)
Public sector demand
Net exports
5.3 5.2
Private sector capital investments
3.4 3.2
Private sector final consumption expenditure

2.8 2.1 2.7
3.4
GDP
1.10.8
2.7 1.6
1.0
2.7
2.9
0.21.1 2.0
1.9
0.3 1.4
0.2

0.0
-2.0

13
46
7
10 -9
06 -12
/1
-3
46
79

05
/

85

86
87
88
89
90
91
92
93
94
95
96
97
98
9
20 9
00
01
02
03
04
05

-4.0

-0.1
-2.0

Real values, derived from a fixed-base estimates formula up to 1994, and a chain-weighted index formula from 1995.
“Other” includes private-sector inventory growth (decrease) and private housing.
Sources: Economic and Social Research Institute, Cabinet Office and Government of Japan

1


Fig. 1-2 GDP Growth Trends
(%)
Real GDP
(annual rate)

Private
Housing
sector final investment

Private
corporate

Private
Net exports
sector
inventories

Exports

Imports

Public
sector
demand

Private

sector
demand

Nominal
GDP

GDP
deflator

Calendar year (YoY)
2000
2.9
2001
0.2
2002
0.3
2003
1.4
2004
2.7
2005
1.9
Fiscal year (YoY)

-

0.7
1.6
1.1
0.4

1.6
1.6

0.9
-5.3
-4.0
-1.0
1.9
-1.3

7.5
1.3
-5.2
4.4
5.6
6.6

0.9
-0.2
-0.3
0.2
0.3
-0.1

0.5
-0.8
0.7
0.7
0.8
0.3

12.7
-6.9
7.5
9.2
13.9
7.0

9.2
0.6
0.9
3.9
8.1
5.8

0.1
1.1
0.4
-1.1
-0.6
0.1

3.2
1.0
-0.7
1.4
2.8
2.2

1.1

-1.0
-1.3
-0.2
1.6
0.6

-1.7
-1.2
-1.5
-1.6
-1.1
-1.3

2000
2.6
2001
-0.8
2002
1.1
2003
2.1
2004
2.0
2005
2.4
Quarter (QoQ)

-

0.7

1.4
1.2
0.6
1.3
1.9

-0.1
-7.7
-2.2
-0.2
1.7
-1.0

7.2
-2.4
-2.9
6.1
6.2
5.8

0.8
-0.5
0.1
0.3
0.1
-0.1

0.1
-0.5
0.7

0.8
0.5
0.5

9.5
-7.9
11.5
9.8
11.4
9.0

9.7
-3.4
4.8
3.0
8.4
6.0

0.7
0.6
0.1
-0.5
-1.5
0.4

3.0
-0.5
0.4
1.9
2.4

2.4

0.9
-2.1
-0.8
0.8
0.9
1.0

-1.6
-1.3
-1.8
-1.3
-1.0
-1.3

2005/1-3
4-6
7-9
10-12

0.8
0.8
0.7
0.5

3.4
3.2
2.8
2.1

0.8
0.9
0.6
0.5

-1.5
-1.6
1.0
1.5

2.5
1.6
0.9
-0.8

-0.1
0.1
-0.2
0.0

0.0
0.3
0.0
0.6

-0.3
3.4
3.0
3.8

-0.3
1.2
3.5
-0.2

0.8
-1.0
1.9
-1.3

0.9
1.0
0.4
0.3

0.1
0.4
0.1
0.4

-1.0
-1.0
-1.4
-1.6

2006/1-3
4-6
7-9

0.7
0.3
0.2

2.7
1.1
0.8

-0.1
0.5
-0.9

0.9
-2.1
-0.3

3.6
3.2
1.5

0.2
-0.2
0.2

0.1
-0.1
0.4

2.3
0.7

2.5

1.9
1.3
-0.5

-0.6
-0.9
-0.4

0.9
0.7
-0.2

0.4
0.0
0.0

-1.3
-1.1
-0.7

Levels of contribution to overall GDP by private-sector inventories and net exports. Quarterly GDP deflator figures
show annual change.
Sources: Economic and Social Research Institute, Cabinet Office and Government of Japan

06/01

05/01

04/01

03/01

02/01

01/01

00/01

99/01

98/01

97/01

96/01

95/01

Fig. 1-3 Consumer and Wholesale Price Trends
The
current
economic
expansion, which began in January
(% Y oY )
(% Y oY )
8.0
40.0
2002 and reached 58 months as of

C orp orate goods (sem i-finished, right ax is)
C orp orate goods (finished goods)
November 2006, almost certainly
C onsum er Price Index (ex cep t fresh foods)
6.0
30.0
will be declared the longest postwar
G D P deflator
1
C orp orate goods (raw m aterials, right ax is)
growth period , surpassing the
4.0
20.0
57-month
Izanagi
boom
in
1965–1970.
The
economic
2.0
10.0
sentiment diffusion index (DI,
0.0
0.0
coincident indicators), which shows
the economy’s current direction, fell
-2.0
-10.0
below the 50 midpoint in both

February and March, but then
-4.0
-20.0
trended above 50 for the rest of the
-6.0
-30.0
year. The coincident indicators,
which indicate the value of the
economy, rose to 113.0 in October
and thereby bested the previous Impact of sales tax increase not reflected in corporate goods index or CPI.
record of 112.2 set in October 1990. Sources: Statistics Bureau, Ministry of Internal Affairs and Communications; Bank of
Nevertheless, the leading indicator Japan; Economic and Social Research Institute; Cabinet Office and Government of
Japan
1
It has not yet been precisely determined that a new record has been set because the Cabinet Office council that researches economic
indicators issues its analysis of business cycles (economic peaks and troughs) retroactively. The current cycle’s trough, for example,
which occurred in January 2001, was tentatively proclaimed in June 2003 and officially confirmed in November 2004.

2


DI was below 50 from July to September, and the coincident indicators also fell after peaking in May, so
the data2 could be taken as suggesting an impending economic correction.
Fig. 1-4

D.I. Trends

100

50

Leading
Coincident
Lagging

87
/1
88 -3
/1
89 -3
/1
90 -3
/1
91 -3
/1
92 -3
/1
93 -3
/1
94 -3
/1
95 -3
/1
96 -3
/1
97 -3
/1
98 -3
/1
99 -3
/1

00 -3
/1
01 -3
/1
02 -3
/1
03 -3
/1
04 -3
/1
05 -3
/1
06 -3
/1
-3

0

Fig. 1-5

C.I. Trends

130
120
110
100
90
80
70
60

50

73
/0
74 4
/1
76 0
/0
77 4
/1
79 0
/0
80 4
/1
82 0
/0
83 4
/1
85 0
/0
86 4
/1
88 0
/0
89 4
/1
91 0
/0
92 4
/1

94 0
/0
95 4
/1
97 0
/0
98 4
/1
00 0
/0
01 4
/1
03 0
/0
04 4
/1
06 0
/0
4

Leading
Coincident
Lagging

Shaded areas indicate recession. D.I. plots average quarterly values, but data for October 2005 is monthly value.
Source: Cabinet Office

Fig. 1-6

Business Cycles in Japanese Economy

Trough
1st cycle
2nd cycle
3rd cycle
4th cycle
5th cycle
6th cycle
7th cycle
8th cycle
9th cycle
10th cycle
11th cycle
12th cycle
13th cycle

1951/10
1954/11
1958/06
1962/10
1965/10
1971/12
1975/03
1977/10
1983/02
1986/11
1993/10
1999/01

Peak

Period

Trough

1951/06
1954/01
1957/06
1961/12
1964/10
1970/07
1973/11
1977/01
1980/02
1985/06
1991/02
1997/05
2000/11

1951/10
1954/11
1958/06
1962/10
1965/10
1971/12
1975/03
1977/10
1983/02
1986/11
1993/10

1999/01
2002/01

Average

33.2

Expansion

27 months
31 months
42 months
24 months
57 months
23 months
22 months
28 months
28 months
51 months
43 months
22 months

Recession
4 months
10 months
12 months
10 months
12 months
17 months
16 months

9 months
36 months
17 months
32 months
20 months
14 months

17.1

Entire cycle
37 months
43 months
52 months
36 months
74 months
39 months
31 months
64 months
45 months
83 months
63 months
36 months

50.3

Current cycle continued for 60 months as of January 2007.
Source: Cabinet Office

2

Seen by past patterns, leading (coincident) indicators peak around a half year ahead of the economy’s peak.

3


B. Characteristics of Current Economic Growth

Fig. 1-8
30.0

Sentiment on Three Excesses

(Points)

50.0

Growth in Exports, Imports and Industrial
Production Index from 1990

35.0
30.0

(%)

46.0

10.0

25.0

44.0

0.0

20.0

42.0

15.0

40.0

-10.0

38.0

10.0

36.0
Recession
Over-staffing sentiment (excess – shortage)
34.0
Excess facilities sentiment (excess – shortage)
Interest-bearing debt to total assets ratio (right axis)
32.0

5.0

-5.0

30.0

-10.0

-20.0

-40.0

(%)

Fig. 1-9

48.0

20.0

-30.0

4

0

m
on
t
m hs
on
8 th
m s
12 ont

m hs
16 ont
m hs
20 ont
m hs
24 ont
m hs
28 ont
m hs
32 ont
m hs
36 ont
m hs
40 ont
m hs
44 ont
m hs
48 ont
m hs
52 ont
m hs
56 ont
m hs
on
th
s

In the current economic growth Fig. 1-7 C.I. Trends for Previous and Current Business Cycles
phase, as well as in the period from the
collapse of the economic bubble to

135
around 2001, external demand in the
(Business cycle trough = 0
corporate sector has led the way. The
130
months)
current phase has also benefited from a
125
virtuous cycle of corporate profits
boosting employment and consumer
120
sentiment, which in turn spurred
consumer spending. But companies
115
have yet to raise wages, especially
contractually obligated payments, so
110
consumer spending has remained fragile
March 1975~January 1977
105
and the recovery has been relatively
September 1977~February 1980
sluggish compared to previous periods
February 1983~June 1985
100
November 1986~March 1991
of economic growth (Fig. 1-7). The
October 1993~May 1975
private sector has worked to eliminate
January 1999~October 2000

95
the so-called “three excesses,” i.e.,
January 2002~
excess debt, employment and facilities,
so perceptions of oversupply in
employment and facilities have been
mostly eliminated (Fig. 1-8), while
Source: Cabinet Office
banks nationwide have reduced bad
debts by more than 60% from the peak. With the three excesses now behind Japan, deflation also has
nearly been eliminated.
Foreign countries also had a hand in the elimination of the three excesses. In the 1990s, following
the collapse of the Soviet bloc, China and other former socialist countries leveraged their low-cost labor
to rapidly increase their presence on the supply side, which at first increased the breadth of direct and

BoJ Tankan survey’s employment D.I. is used for employment
and manufacturing plant D.I. is used for facilities.
Sources: Bank of Japan and Ministry of Finance

1991 - 1995
1996 - 2000
2001 - November 2006
Export volume
index

91
/
92 1/ 3
93 1/ 3
94 1/1 3

95 / 3
96 1/ 3
97 1/1 3
98 / 3
99 1/ 3
00 1/ 3
01 1/1 3
02 / 3
03 1/ 3
04 1/1 3
05 - 3
/
06 1-3
/1
-3

-50.0

0.0

Import volume
index

Industrial
production index

Sources: Ministry of Economy, Trade and Industry, and Ministry
of Finance

4

indirect supply-side pressure on Japan. But as some of these countries developed their consumer markets
and other demand-side economies in the 2000s, they then eased supply-side pressures on the Japanese
economy by ameliorating their exports to Japan while purchasing increased exports from Japan (Fig.
1-9).
Another characteristic of the recovery has been sustained growth despite substantial cuts in
government expenditure. Public demand (total government expenditure, public fixed-capital formation
and increased public inventories) as a share of GDP reached more than 24% between 2001 and 2002, but
fell to 21% in the second quarter of 2006 and contributed negatively to economic growth (figs. 1-10 &
1-11).
Following the inauguration of the Koizumi administration in April 2001, the government designated
the following three years to fiscal 2004 as a period of structural reform. Measures included stepped-up
efforts to eliminate non-performing assets, resolution of bad debts through the Financial Revitalization
Program and economic stimulation through regulatory reform, such as specially deregulated zones and
reduced taxation of R&D and capital expenditure. The effect was reduced downward pressure on the
economy and stronger stimulation of the private sector. On the other hand, rapidly retrenched
employment and declining government expenditure, as well as changes in industrial structure, led to
widening disparities in income, consumer spending and household assets. Moreover, reduced public
works led to widening regional disparities (see Column 1). The Abe administration, after taking in
September 2006, has made the promotion of new opportunities one of its main policies. Specifically, it
has encouraged steady employment for job-hopping “freeters,” offered assistance to families headed by
single mothers to help them become more independent, banned multiple consumer loans, and provided
support for entrepreneurs and people restarting their careers.
Fig. 1-10

Public Demand’s Share of GDP

Fig. 1-11

25

Increase/Decrease in Contribution to GDP
by Demand Line Item
1.8

2.0 (Annual rate, %)

(%)

1.5

23

1.5
0.0

1.0

24

0.9

0.7

0.5
0.5
0.6

22

0.0
21

/1
95 - 3
/1
96 - 3
/1
97 - 3
/1
98 - 3
/1
99 - 3
/1
00 - 3
/1
01 - 3
/1
02 - 3
/1
03 - 3
/1
04 - 3
/1
05 - 3
/1
06 - 3
/1
-3

-0.5

0.2
0.2
0.1

External demand
Public demand
Private demand

1996-2001

-0.2

2002-2006/3Q

94

1991-1995

1.2

Sources: Economic and Social Research Institute,
Cabinet Office and Government of Japan

Real values, derived from a fixed-base estimates formula up to
1995, and a chain-weighted index formula from 1996.
Source: Economic and Social Research Institute, Cabinet Office
and Government of Japan

C. Issues and Outlook for Japanese Economy
1) Population decline and need for higher productivity in services
The Japanese population decreased by 21,266 to mark its first postwar decline in 2005, according to

5


19
5
19 0
5
19 5
6
19 0
6
19 5
7
19 0
7
19 5
8
19 0
8
19 5
9
19 0
9
20 5
0

20 0
0
20 5
1
20 0
1
20 5
2
20 0
2
20 5
3
20 0
3
20 5
4
20 0
4
20 5
5
20 0
55

official statistics released on November 30,
Fig. 1-12 Japanese Population Estimates
2006. The forecast is for the population to fall
below 100 million by 2046 and 90 million by
140
(million people)
2055, a faster decline than previously

anticipated (Fig. 1-12). This will have an
adverse effect on the economy owing to the
Population peak in
2005 (127,768,000)
diminishing stock of capital due to declining
100
labor inputs, while aging will put downward
Population growth (actual)
pressure on the overall economy due to
Old estimate (January 02)
reduced levels of personal savings. An aging
New estimate (January 07)
population will also have an impact on social
60
guarantees such as pensions and medical care,
leading to pressure to revise the entire social
security system. To ease such pressures and
Source: National Institute of Population and Social
achieve sustainable economic growth,
Security Research
measures will be needed to halt declining
births, and bring women and older citizens
Fig. 1-13 TFP Growth Rate
more fully into the labor force. Although Japan
experienced a lengthy economic downturn
1.2
from the mid-90s to 2001, overall productivity
(%)
1.0
was not impaired and growth was at levels not

substantially lower than those of other major
0.8
developed nations (figs. 1-13 & 1-14). But
0.6
while
manufacturing
maintained
high
0.4
productivity compared to other nations, the
0.2
services sector was weak (Fig. 1-15). Since the
0.0
service sector’s share of the economy is
increasing, improved productivity is vital. The
95 96 97 98 99 00 01 02 03 04 05
new economic growth strategies announced in
May 2006 contain specific measures to boost
Source: Council on Economic and Fiscal Policy
competitiveness and productivity, such as
promoting new business models, deregulation, training, IT and foreign direct investment entering Japan.

Fig. 1-14
3.5
3.0
2.5
2.0
1.5
1.0
0.5

0.0
-0.5
-1.0
-1.5

Breakdown of Economic Growth in Major
Nations
2.8
0.7
1.0

3.2
1.2

0.9
1.0

0.7
1.1

1.5

1.0

2.5

3.2
0.5
0.9
1.4

2.1
0.2
0.6

1.3
0.3

Capital input volume

(%)

Manufacturing
Enterprise services
Other services
Other industries

1.5
1.0

1.1

1.0

Productivity Contributions in Major
Nations, by Industry

2.0

-0.2

-0.8
TFP

Fig. 1-15

0.5

Labor input volume

Japan

U.S.

Canada

U.K.

Germany

(95-04)

(95-05)

(95-05)

(95-03)

(95-05)

0.0

France
(95-05)

-0.5
U.K.

Source: OECD

Source: OECD

6

Japan

U.S.

Germany Canada

France


2) Fiscal restructuring
Japan’s government finances are the worst among developed nations, so fiscal restructuring is
required (Fig 1-16). In the January 2002 Structural Reform and Medium-Term Economic and Fiscal
Perspectives, the government announced it would turn the deficit into a surplus by the early 2010s by
reducing spending through structural reforms. In fact, some anticipate that a surplus might be possible
even sooner, due to increased corporate tax revenues in conjunction with the economic upswing. In fact,
improvements proceeded faster than expected at the start of 2006, with the primary balance for FY2006

estimated at ¥11.2 trillion (2.2% of GDP) and ¥4.4 trillion (0.8% of GDP) for FY2007 under the
proposed budget (Fig. 1-17). Government debt issued under the draft FY2007 budget would be reduced
to ¥25.4 trillion, down from ¥29.97 trillion in FY2006, with the aim of further reductions for the next
three years. Assuming steady progress in fiscal restructuring, dependence on government bonds would
drop to 30.7%, down from a peak of 41.8% (real) in FY2003.
Fig. 1-16

200
180
160

Government Debt as % of GDP in Major
Nations

Fig. 1-17

Government Basic Expenditure as %
of GDP

(%)
Japan
U.K.
France
Canada

0.0

U.S.
Germany
Italy

Actual
Outlook as of January 06

-0.5
-1.0

140

-1.5

120

％

-2.0

100

-2.5

80

-3.0

60

-3.5

40

-4.0

20

-4.5

0

03

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
(e) (e) (e)

Source: OECD

04

05

06

07

08

09 10 11
(Annual rate)

Sources: Ministry of Finance and Council on

Economic and Fiscal Policy

3) Robust economic growth, but weak consumer spending
Ensuring that Japan’s economic expansion continues in 2007 will require prudent action. Although
companies have steadily improved their finances and profits, they have remained cautious about raising
wages, especially contractually obligated payments (figs. 1-18 & 1-19). Companies still believe that in
light of intense international competition, stronger earnings should be passed along to employees only as
bonuses or one-time payments3. Consumer spending through 2006 did not exhibit a clear growth trend
due to the lag in wages, and it is unlikely that improved employment will boost consumer spending in
2007. However, it is also difficult to conceive this might lead to a correction in the economy.
Manufacturers and other leading corporations have nearly completed their financial restructuring by
putting lean financial structures into place. In employment, baby boomers born between 1947 and 1949
will begin to retire in 2007, so the real issue will be how to ensure sufficient staffing. In fact, perceptions
of a tighter labor supply in light of increasing demand are expected to grow. Despite low expectations of
wage increases, substantially lower wages are very unlikely.
3

In the Nihon Keizai Shimbun’s Survey of 100 Company Presidents, just 26% said they would increase wage levels in 2007.

7


Fig. 1-18

Labor Share Trends

Fig. 1-19

Real Growth in Capital Expenditure and
Wages

56
55

(%)

20.0

(% YoY)

4.0
3.0

54
10.0

53

2.0
1.0

52
0.0

51

0.0
-1.0

50

-10.0

49

-2.0
Capital expenditure

48

-3.0
-4.0

95

/1
96 - 3
/1
97 - 3
/1
98 - 3
/1
99 - 3
/1
00 - 3
/1
01 - 3
/1
02 - 3
/1
03 - 3

/1
04 - 3
/1
05 - 3
/1
06 - 3
/1
-3

94
/
95 1/1 3
96 - 3
/
97 1/1 3
98 / 3
99 1- 3
/
00 1/1 3
01 - 3
/
02 1/ 3
03 1/ 3
04 1- 3
/
05 1/1 3
06 - 3
/1
-3

-20.0

Wages (right axis)

Labor share = wages/GDP
Sources: Economic and Social Research Institute,
Cabinet Office and Government of Japan

Sources: Economic and Social Research Institute, Cabinet
Office and Government of Japan

The corporate sector, after supporting the
Fig. 1-20 IMF Country/Region Forecasts
economy in 2006, should again enjoy strong
profits in the first half, especially among 11.0
10.2
10.1
10.0
10.0
10.0
(% YoY)
exporters, given that the yen weakened
9.1
U.S.
Japan
8.3
unexpectedly to ¥119 to the U.S. dollar as of the
9.0
4
Euro zone

Asia NIEs
2006 yearend . While a temporary lull in capital
ASEAN 4
China
expenditure is expected, if only as a backlash to
7.0
5.9
5.6
5.3
aggressive expenditure through 2006, the
4.9
5.1
5.8
4.4
possibility of a large downturn is limited because
5.5
5.0
3.9
5.0
producers don’t yet feel they have excess
4.5
3.2
4.7
2.9
3.2
3.4
capacity. Corporate profitability will remain
3.0
2.3
2.5

2.7
2.5
1.6
1.8
2.0
2.6
strong.
1.9 1.1
2.4
2.1
2.1
In external demand, the U.S. economy
0.8
1.0
0.9
1.3
0.4
0.8
should slow until around mid-2007 and Asian
0.1
NIEs also appear headed for a slight downturn.
-1.0
2001
2002
2003
2004
2005
2006
2007
Exports to these countries and regions will be

(forecast) (forecast)
affected, but the breadth of decelerated exports
will remain limited due to high growth in China
Forecasts for 2006 and 2007
and the ASEAN region (Fig. 1-20).
Source: IMF
Since domestic oversupply has nearly been
resolved, demand is expected to remain generally firm, except for somewhat fragile consumer spending,
and will exert upward pressure on consumer prices. Crude oil prices (West Texas Intermediate)
continued to fall nearly across the board after hitting an all-time high of $77 in July 2006. Falling petrol
prices will affect consumer prices. Aside from such market factors, however, prices are forecast to
remain stable and deflation will be virtually eliminated in 2007.

4

According to the BoJ’s December 2006 Tankan quarterly survey, manufacturers and leading corporations had expected a rate of
¥113.40 to the dollar in the latter half of 2006.

8


To sum up, capital expenditure, consumer spending and external demand are all expected to grow at
slowed rates in the first half of 2007, but the economy should grow stably, underpinned by solid
corporate earnings. External demand and the corporate sector will steadily pick up speed from midyear,
when signs of a recovery will begin to appear in the U.S. economy. But the pace of the recovery in
consumer spending will be sluggish, so economic growth will lack strength overall. There is a slight
possibility of the economy faltering due to stalled consumer spending resulting from a tightened labor
supply. Nevertheless, stable growth is forecast, although it will lack the strength of economic activity
from 2005 to mid-2006. Of 19 private think tanks, nine have predicted a slowdown in fiscal 2007,
although the forecasts vary widely from 1.2% to 2.5%. All but one predict the deflator will revert to

positive, anticipating an end to the trend of nominal growth exceeding real growth (figs. 1-21 & 1-22).
Fig. 1-21

Private and Government Growth-Rate
Forecasts

Fig. 1-22

(%)
Real GDP
Nominal GDP
Company
FY 2006FY 2007FY 2006FY 2007
Goldman Sachs Japan
1.9
2.5
1.3
2.6
Nikko Citigroup
1.8
2.4
1.3
2.6
The Japan Research Institute
1.8
2.3
1.2
2.5
Nomura Securities Financial & Economic Research Cente
1.8

2.2
1.4
2.5
Morgan Stanley
2.0
2.2
1.3
2.8
Meiji Yasuda Life Insurance
1.9
2.1
1.1
2.4
Daiwa Institute of Research
1.9
2.0
1.2
2.3
Mitsubishi Research Institute
2.0
1.9
1.4
2.2
Dai-Ichi Life Research Institute
1.9
1.9
1.3
2.2
Shinko Research Institute
1.8

1.9
1.3
2.1
Mizuho Research Institute
1.9
1.8
1.6
2.5
Norinchukin Research Institute
2.0
1.7
1.2
2.1
Japan Center for Economic Research
1.8
1.7
1.2
1.8
BNP Paribas
1.7
1.6
1.0
1.5
NLI Research Institute
1.8
1.6
1.3
1.9
Mitsubishi UFJ Securities
1.8

1.6
1.3
1.8
Daiwa Securities SMBC
1.8
1.4
1.0
1.6
Mitsubishi UFJ Research & Consulting
2.0
1.2
1.4
1.4
Bank of Tokyo-Mitsubishi UFJ
1.9
1.2
1.8
2.0
1.9
1.8
1.3
2.1
Average
1.9
1.9
1.3
2.2
Median

Government forecast

1.9

2.0

1.5

2.2

4.0

(% YoY)

3.0 2.5
2.0

Real/Nominal Growth Rates (Fiscal Years)

Real growth rate
Deflator

2.9

1.9

2.4

2.2
2.1 2.0 2.4 1.9 2.0
1.5

1.1
1.0
0.8 0.9

2.6
1.0

1.0

Nominal growth rate

0.9

0.7

0.0

0.0
-1.0

-0.8

-0.7
-1.5
-1.9

-2.0

-2.1

-3.0
95

96

97

98

-0.8

99

00

01

02

03

04

05

06
(f)

Source: Cabinet Office

Sources: Above companies and Cabinet Office

4) Main risk factors are overseas economies and impaired sentiment
A potential risk in 2007 is the possibility of the U.S. economy growing slowly. Many anticipate it
difficult to hope for the U.S. to achieve more than its potential growth rate of around 3% (annualized)
basis in the first half, particularly if consumer spending were curbed by falling home prices and rising
costs of mortgages. If the U.S. economy were to come under even stronger downward pressure, the
effect would be felt in Japan after a lag of around half a year. Under this scenario, the Japanese economy
would be more turbulent in the second half of 2007.
Energy prices rose until midyear 2006, but by the end of the year crude prices (WTI) had fallen
more than 20% from their peak, diminishing anxieties. But in the future, if high prices were coupled
with a weaker yen (which began declining in December 2006), corporate profits would be hurt and fears
of rising consumer prices would increase. Even in this case, however, damage to the overall economy
would be limited so long as energy prices did not match previous highs5.
Domestic factors that may affect consumer sentiment include increased burdens on households and fears

5
Kyoto University Professor Akira Maeda, a research fellow with the Cabinet Office’s Economic and Social Research Institute,
estimates that an effect equal to the 1973 oil shock are inconceivable unless the price of crude were to exceed $125 per barrel.

9

07
(f)


of future tax increases due to the abolition of uniform tax breaks and increases in national pension
premiums, along with local elections in April and upper house elections in July. Many believe that the
long-term political stability of the Koizumi administration contributed significantly to stabile consumer
sentiment, so political developments under the Abe administration bear watching.

10


Column 1: Intensifying Debate on Inequalities
Many countries have experienced growing economic inequalities due to advancing globalization, the
spread of information technologies and intensifying competition. In Japan, the debate over inequalities
began when the country entered recession 1998 and has continued to intensify despite the advent of
economic recovery in 2002.
In February 2006, then-Prime Minister Koizumi answered questions in parliament concerning
income and asset inequalities. In July, the Cabinet Office issued its Annual Report on the Japanese
Economy and Public Finance 2006, which addressed and analyzed the issue. Public opinion polls have
revealed that perceptions of inequalities have been spreading. The OECD Economic Survey of Japan
2006 pointed out that the Gini coefficient6 has risen above the OECD average, making relative poverty
in Japan one of the highest among the OECD countries7. Economists engaged in the debate include
Professor Toshiaki Tachibanaki of Kyoto University, who published Nihon no keizai kakusa (Economic
Inequality in Japan) in 1998 and Kakusa shakai--nani ga mondai nano ka (Social Disparity and the
Nature of the Problem) in 2006, and Professor Fumio Ohtake of Osaka University, who published Nihon
no fubyodo--kakusa shakai no genso to mirai (Inequality in Japan: An Illusion of an Unequal Society
and the Future) in 2005. The Japanese public has grown increasingly concerned about the issue. There is
also the issue of inequalities between Tokyo area and other regions of Japan. Yubari, a town on the
northern island of Hokkaido that suffered a financial collapse, exemplifies the struggles of Japan’s
depressed regional economies.
The mass media in other countries have aired reports about the debate in Japan. Such reports show
that Japan had a well-established reputation as a middle-class country with minor income inequalities
compared to the high-income countries of Europe and North America.
Has income inequality been growing in Japan? Moreover, is the magnitude of the problem
comparatively large in international terms?
Public opinion polls consistently indicate that the Japanese have developed heightened perceptions of
economic disparities and inequalities 8 . This is true among households headed by non-regular

wage-earners, whose presence has grown amid corporate restructuring and downsizing. The growing
population of “freeters” and NEETs 9 is due in part to severe employment conditions faced by
young-adult Japanese. Economists are paying attention to the growing inequality of their incomes, a key
point in the debate.
The Gini coefficient, which is based on published statistical data, confirms that income inequality
slowly increased from the 1980s. According to the Japanese government, the major cause was the
growing number of households comprising elderly people. From 1999, however, there was a distinct
upward trend in the Gini coefficient among the younger population. No doubt, the future will bring calls
for further measures to diversify employment patterns and address related problems of young adults.
There is also the issue of international comparisons, wherein the Gini coefficient for Japan is about
the average for other OECD countries (see figure). In fact, income inequality is smaller in Japan than in
the United Kingdom and the United States. Comparisons introduce the problem of whether to work from
relative or absolute poverty levels. In OECD statistics, figures vary greatly depending on how they are
prepared, which makes simple comparisons impossible.

6
This is a numerical indicator of unequal versus perfect income distribution. The coefficient is 0 for perfect equality, and around 1 for
total inequality (Appended Table 3-4, Annual Report on the Japanese Economy and Public Finance 2006)
7
The Ministry of Internal Affairs and Communications announced in November 2006 that it had calculated Gini coefficients on the basis
of disposable income in the National Survey of Family Income and Expenditure 2004 and found that Japan ranked twelfth among the 24
OECD countries with which comparisons were possible.
8
Appended Table 3-10, Annual Report on the Japanese Economy and Public Finance 2006
9
Freeters are people of ages 15 to 34 who choose to work on a part-time or temporary basis. “NEETs” (Not in Employment, Education
or Training) are people of the same age group who are counted as unemployed.

11

In terms of inequalities between executive and non-executive wages, U.S. executives earn
compensation and benefits that are extremely high compared to those in Japan. Some reports have called
for corrections in this inequality10. Even here, however, it is difficult to conclude that income inequality
in Japan is greater than that in Europe or North America. In any event, inequalities tend to be linked with
growing social unrest and crime worldwide, so the need for solutions is universal.
Fig 1

International Comparison of Gini Coefficients for 27 OECD Countries

50
45

48.0
43.9

Average of 27 countries=30.7%

40
35
30
25 22.5

24.3 25.1

25.2 26.0

26.1 26.1 26.1 26.7

29.3 30.1 30.4 30.5

27.7
27.2 27.3

31.4

32.6

34.5
32.9 33.7

34.7

35.6 35.7

36.7

20
15

D

en
m
a
Sw rk
N
ed
et
he en
rla

n
Cz
A ds
ec u
h str
R ia
Lu epu
xe bli
m c
bo
u
Fi r g
nl
an
N d
Sw orw
itz ay
er
la
Be nd
lg
iu
Fr m
an
G ce
er
m
H a ny
un
ga

Ca ry
na
d
Ire a
A land
us
tra
U
lia
ni
te Ja
d
pa
K
in n
gd
om
N
Sp
ew
a
Ze in
al
an
G d
re
ec
e
Ita
Po l y

U
ni rtug
te
d al
St
at
Po es
la
n
Tu d
rk
M ey
ex
ic
o

10

Calculations based on household disposable income after adjustment for number of households. Data as of 1995 for
Belgium and Spain; 1999 for Australia, Austria and Greece; 2001 for Germany, Luxembourg and New Zealand; 2002 for
Czech Republic, Mexico and Turkey; and 2000 for all others.
Source: OECD

10

Christian Science Monitor, January 4, 2007

12

2. Trade and Direct Investment: Ties with Emerging Markets Deepen
A. Exports and Imports Reach High Levels
Japanese exports during
January to November 2006 rose
7.8% over the same period in
2005 to $587.7 billion (Fig.
2-1). The yen’s depreciation
and a buoyant world economy
helped
exports
achieve
quarterly
year-on-year
increases of 4.8%, 7.3% and
10.4% in the first three quarters,
respectively.
Imports rose 11.5% to
$527.6 billion, maintaining
double-digit growth since 2003.
The trade balance over the
same period was $60.1 billion,
down $11.8 billion from 2005.
Import value rose as the
Japanese economy recovered
and crude oil prices soared.
By
volume,
exports
increased 11.2%, 8.7% and
8.4% in the first three quarters,

respectively. Yet export growth
for all of 2005 was just 0.8%.
Export volume was solid for all
regions except the ASEAN4
nations. Import volume grew
4.5%, exceeding the 2.9% rate
of 2005.

B. Trade Trends by
Geographic Area
(Jan.–Nov.)
The largest contributions to
export growth were China (2.0
points), the U.S. (1.8 points)
and South Korea (0.5 point).
1) Double-Digit Exports to
China

Fig. 2-1 Japanese Exports and Imports
2005
Exports
YoY change
Imports
YoY change
Trade with Balance of payments
YoY change
World
Export volume index
YoY change
Import volume undex

YoY change
Average
Exchange
YoY change
Rate (yen/$)
$/barrel
Oil Import
YoY change
Price

598.3
5.9
518.0
13.9
80.3
-27.3
114.3
0.8
117.6
2.7
110.2
-1.8
51.1
40.5

2006
(Jan-Nov)
587.7
7.8
527.6

11.5
60.1
-11.8
122.6
8.1
122.8
4.5
116.2
-5.9
64.6
27.5

I
151.2
4.8
137.9
13.5
133.6
-9.5
119.2
11.2
121.0
5.4
116.9
-10.6
59.5
46.1

(US$ billions, %)
2006

II
III
158.2
166.3
7.3
10.4
142.0
148.5
11.0
11.4
161.6
177.6
-3.3
0.4
122.5
125.7
8.7
8.4
121.9
122.5
4.5
2.9
114.4
116.2
-5.9
-4.3
64.9
70.7
30.5
26.0

Volume compared with 2000. Exchange rates are Interbank averages. Data as of December 28, 2006.
Sources: Ministry of Finance and Bank of Japan

Fig. 2-2 Trade Trends by Geographic Area
(US$ billions, %)
2006
2006
2005
Q2
Q3
(Jan-Nov)
Q1
Exports
134.9
132.9
34.4
35.5
37.3
YoY change
6.3
8.1
5.0
6.7
12.5
Imports
64.5
62.6
16.4
17.0

17.4
U.S.
YoY change
3.3
6.2
7.1
2.1
5.3
Export volume YoY change
2.1
9.1
9.3
8.4
9.7
Import volume YoY change
1.6
1.5
0.2
-3.7
0.9
Exports
88.0
84.7
22.6
23.1
23.1
YoY change
0.7
5.7
0.0

7.0
9.1
Imports
59.1
54.5
14.9
14.6
14.8
EU25
YoY change
3.0
0.0
-1.8
-2.1
2.1
Export volume increase
-5.2
3.9
3.8
5.4
5.0
Import volume increase
0.2
0.3
1.8
-1.1
0.8
Exports
279.4
268.3

67.9
72.9
76.6
YoY change
5.5
5.3
2.7
4.9
7.0
East Asia 9
Imports
219.3
218.1
56.8
58.3
60.4
YoY change
11.9
8.7
7.2
7.0
9.2
Exports
145.5
136.8
35.3
37.6
38.6
YoY change
4.3

3.0
0.4
3.5
4.5
Imports
51.0
51.6
13.9
13.9
14.1
Asia NIEs
YoY change
9.5
10.6
13.3
9.3
10.3
Export volume increase
-5.5
8.0
5.1
12.2
8.9
Import volume increase
5.8
20.9
28.8
32.9
15.8
Exports

53.6
47.8
12.3
12.7
13.9
YoY change
4.2
-2.8
-5.5
-8.7
2.3
Imports
59.2
58.7
15.3
15.7
16.5
ASEAN 4
YoY change
7.4
8.2
4.5
6.3
9.9
Export volume increase
1.4
0.3
3.4
-1.0
0.3

Import volume increase
-1.6
3.8
-1.9
5.5
5.0
Exports
80.3
83.7
20.3
22.5
24.0
YoY change
8.8
15.1
13.0
17.4
14.3
Imports
109.1
107.8
27.6
28.7
29.8
China
YoY change
15.8
8.0
5.9
6.2

8.3
Export volume increase
2.4
14.8
19.0
18.4
11.7
Import volume increase
11.2
7.9
8.8
6.4
6.5
Asia NIEs are South Korea, Taiwan, Hong Kong and Singapore. ASEAN 4 are Indonesia, Thailand,
Philippines and Malaysia. ASEAN 10 export/import volume increases cover ASEAN 4 only. Data
as of December 28, 2006.
Source: Ministry of Finance

13


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Exports to China
Fig. 2-3 Changes in Exports to China by Product
climbed 15.1% to
(% QoQ)
$83.7
billion,
70
following growth of
Others
60
Metal products

8.8%
in
2005.
Chemical products
Precision equipment
Electrical equipment
50
Double-digit growth
General machinery
Transport equipment
was maintained in each
Total export volume
40
Total export value
of the first three
30
quarters: 19.0%, 18.4%
and
11.7%,
20
respectively. Electrical
10
machinery, including
semiconductors
and
0
electronic components,
jumped 19.8% to $22.5 -10
billion (Fig. 2-3). The -20
main

factor
was
electrical
machinery
Source: Ministry of Finance
exports,
which
continued to rise as companies in Japan increasingly supplied parts to Japanese-owned companies in
China, which then assembled and exported finished products back to Japan. Exports of machinery, such
as engines, grew 12.2% to $17.3 billion. Local orders grew nicely as China’s increased needs for energy
drove up demand for plant construction.

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2) Automobiles Boost Exports to U.S.
Exports to the
United States rose
Fig. 2-4 Contributions to Changes in Exports to the U.S., by Commodity
8.1% to $132.9 billion.
(% QoQ)
Volume climbed 9.3%,
15
8.4% and 9.7% in the
10
first three quarters,
respectively.
5
Transport

0
equipment
exports
were strong, rising
-5
18.2% to $53.4 billion,
Others
which
included
-10
Precision equipment
Electrical equipment
automobiles growing
General machinery
-15
Transport equipment
25% to $41.2 billion
Total export volume
(Fig. 2-4). The U.S.
Total export value
-20
accounted for 1.8
-25
points of the increase
in Japan’s total exports,
with 1.5 points coming
Source: Ministry of Finance
from automobiles. In
addition to increased demand for smaller vehicles due to soaring gasoline prices, Japanese exports
benefited from a lag in the U.S. production of popular Japanese compact cars, hybrids and diesel

vehicles. The depreciation of the yen also drove up export value as models from Japan enjoyed strong
demand (Fig. 2-5). After growing 7.3% to 1.93 million vehicles in 2005, exports skyrocketed 29.9% to
2.28 million vehicles during January to November 2006.


A stagnant U.S. housing
market dampened Japanese
exports of construction and
mining equipment. After a
mercurial rise of 65.3% in
2004, equipment exports
plummeted 24.5% in 2005
and slipped another 13.5% in
2006.

Fig. 2-5 Auto Exports to and Sales in U.S.
(vehicles, %)
2005
2006
(full year)
(Jan.-Nov.)
Exported to U.S.
1,925,357
2,276,244
(YoY change)
7.3
29.9
Sold in U.S.
922,934
1,051,552

(YoYchange)
13.9
24.6
Sources: Japan Automobile Manufacturers Association and Ministry of Finance

3) Exports to Brazil, India and Russia Grow
Trade (January to November) with the emerging economies of Brazil, India and Russia rose 35.8%
to $13.2 billion, fueled by high prices for primary commodities and increased exports of machinery.
Although these three countries accounted for just 2.2% of Japan’s total trade, they each saw their trade
with Japan grow by double digits.
Exports to Brazil rose 12.3% to $2.8 billion, Russia 58.9% to $6.4 billion and India 24.9% to $4.0
billion. Fast-growing exports to Brazil included transport equipment, up 20.3% to $700 million, of
which automotive parts rose 8.4% to $400 million. India-bound exports were led by machinery, up
31.0% to $1.3 billion, of which metalworking machinery grew 50.6% to $200 million. Automobile
exports to Russia climbed 62.1% to $3.2 billion, much of which comprised used vehicles. Automobiles,
which accounted for 74.7% of exports to Russia, were expected to hit an all-time high for the seventh
consecutive year.

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02
/1

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3

/1
-

01

46

4) Middle Eastern Countries Drive Import Growth
Looking at import
Fig. 2-6 Changes in Imports Entering Japan, by Geographic Area
(% QoQ)
growth by trading partner
(Fig. 2-6), the largest
25
contributors were Saudi
20
Arabia (2.7 points),
15
China (2.5 points) and
10
the United Arab Emirates
5
(UAE, 2.1 points).
The increased value
0
of imports from the

Others
-5
Middle East
Middle East was largely
ASEAN 4
-10
Asia NIEs
due to high prices for
China
-15
EU25
crude oil. Imports from
U.S.
Total import value
Saudi Arabia (up 32.6%
-20
to $34.2 billion) and the
-25
UAE (up 29.7% to $29.3
billion) accounted for
Source: Ministry of Finance
42.7% of Japan’s mineral
fuel imports.
Although imports from China rose 8.0% to $107.8 billion, this was down from 15.8% for all of 2005.
Leading categories were semiconductors and electronic components (up 25.6% to $2.0 billion). On a
volume basis, growth slowed from 11.2% in 2005 to 7.9% in 2006 due in part to mineral fuels falling
13.4% to $2.6 billion, of which coal dropped 19.1% to $1.4 billion. China’s export capacity shrank as
priority was shifted to meet domestic needs.

C. Trade by Product
1) Automobile Exports Expand
Automobiles were the major contributor to Japan’s increased exports, which grew 16.3% to $95.8
billion (Fig. 2-7). Exports were also boosted by electrical machinery (up 4.0% to $125.7 billion),
including electronic parts (up 3.1% to $37.7 billion) and parts for consumer electronics (up 14.7% to
$12.2 billion).
Automobile exports, robust throughout the year, were estimated to have accounted for more than
50% of total production by major automakers for the first time since 1987 (see column). The U.S. took
about 40% of Japanese vehicle exports. Exports to Russia soared 76.7% to $48.0 billion, mainly due to
increased used car sales.
Electrical machinery exports to China jumped 19.8% to $22.5 billion, while those to Mexico shot up
34.6% to $3.2 billion. Downward pressure was exerted by precision instruments, including a 6.7% fall to
$20.2 billion for scientific and optical instruments, particularly those to Asian NIEs, which slumped
12.5% to $8.1 billion.

Fig. 2-7 Japanese Exports by Product (Jan.-Nov. 2006)
(US$ millions, %)
Contribution
Amount
% YoY
Share
Total
587,687
7.8
100.0
7.8
Food
2,736
6.2
0.5

0.0
Textiles and textile products
7,554
-0.6
1.3
0.0
Chemical products
53,063
9.6
9.0
0.9
Non-metallic mineral products
6,752
6.6
1.2
0.1
Metal and similar products
45,037
13.7
7.7
1.0
　 Steel
　
27,081
6.9
4.6
0.3
115,595
4.2
19.7

0.9
General machinery
Electrical equipment
125,675
4.0
21.4
0.9
Transportation equipment
142,412
12.6
24.2
2.9
　 Automobiles
　
95,820
16.3
16.3
2.5
23,580
1.8
4.0
0.1
　　Automobile parts
Precision equipment
20,204
-6.7
3.4
-0.3
Other
68,660

13.0
11.7
1.5
Source: Ministry of Finance

16


Column 2: Auto Export Ratio Estimated to Have Exceeded 50% for First Time in 19 Years

19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93

19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
20
04
06
(J 20
an 05
.-N
ov
.)

Vehicle exports in 2006
(%)
(January
to
November) (1,000 vehicles)
Fig. 1 Annual Vehicle Production and Export Ratios
14,000
90
increased 17.8% to 5.42 million
No. of vehicles produced
No. of vehicles exported
80
vehicles, according to the Japan 12,000
Export ratio (right axis)
Automobile
Manufacturers
70
Association. The ratio of 10,000
60
exports to total domestic 8,000
50
production was estimated at
40
51.4%, the first time to exceed 6,000
the 50% mark since 1987.
30
The increase was due to: 1) 4,000
20
rising
demand

for 2,000
10
energy-efficient
Japanese
0
0
vehicles due to rising crude-oil
prices in the U.S., 2) lagging
Source: Japan Automobile Manufacturers Association
overseas production of popular
Japanese vehicles and 3) a
weaker yen. In 2006, the price
of crude oil rose 27.5% to $64.60 per barrel, a more than 2.5-fold increase since 2001. As gasoline
prices rose, the demand for more fuel-efficient cars increased. Double-digit growth in unit exports was
reported by all domestic automakers except Nissan and Fuji Heavy Industries (Fig. 2). Exports to the
U.S. were particularly strong.
Offshore production in January to June rose 5.6% to 5.41 million vehicles. Although production
increased in various regions of the world, it did not keep pace with global demand.
The yen declined 5.9% to ¥116.2 per dollar in 2006 (January to November). It also depreciated
against the euro, while exports to the EU25 rose 3.0% to 830,000 vehicles.
Fig. 2 Vehicle Production and Exports in 2006 (Jan.-Nov.)
(vehicles, %)
Vehicles
Vehicles made
Export ratio
YoY change
exported
Toyota
3,855,900
2,303,370

23.9
59.7
Mazda
882,432
652,565
19.4
74.0
1,137,484
583,008
-6.1
51.3
Nissan
Honda
1,216,488
567,183
20.3
46.6
Mitsubishi
686,580
367,632
13.2
53.5
Suzuki
1,105,028
335,337
32.7
30.3
Fuji Heavy Industries
442,361
217,228

9.9
49.1
Daihatsu
727,952
123,072
23.0
16.9
Total
10,529,193
5,415,087
17.8
51.4
Companies shown in descending order of exports.
Source: Japan Automobile Manufacturers Association

17


Fig. 2-8 Japanese Imports by Product (Jan.-Nov. 2006)
Import value was boosted by
(US$ millions, %, points)
mineral fuels such as petroleum
Contribution
Amount YoY change
Share
(up 43.1% to $56.8 billion). Total
527,560
11.5
100.0
11.5

44,623
-4.2
8.5
-0.4
Machinery and equipment, such Food
36,108
23.0
6.8
1.4
as semiconductors and electronic Raw materials
Mineral fuels
146,657
23.0
27.8
5.8
components, grew 18.9% to $23.2 　 Petroleum
　
90,646
26.1
17.2
4.0
billion (Fig. 2-8).
Chemical products
38,681
6.1
7.3
0.5
　
7,851
3.3

1.5
0.1
Crude oil prices rose above 　 Medical products
Machinery and equipment
151,700
8.5
28.8
2.5
the $60 threshold to average 　　Office equipment
24,082
-4.5
4.6
-0.2
$64.6
per
barrel
in 　 Audio/visual equipment
　
12,194
-7.8
2.3
-0.2
　
23,169
18.9
4.4
0.8
January–November. In the third 　 Semiconductors and electronic components
　
7,158

-6.7
1.4
-0.1
quarter, prices broke through the 　 Automobiles
　 Aircraft
　
4,668
10.8
0.9
0.1
$70 barrier to average $70.7 per 　　Scientific and optical instruments
14,244
19.0
2.7
0.5
27,447
5.0
5.2
0.3
barrel.
The
rising
trend Textile goods
21,838
4.9
4.1
0.2
throughout the year fueled a rapid 　　Clothes and similar products
Non-metallic mineral products
5,690

4.9
1.1
0.1
increase in the value of petroleum Metals and similar products
29,660
18.5
5.6
1.0
imports (Fig. 2-9). In November, 　　Iron and steel
5,826
-14.8
1.1
-0.2
46,995
4.0
8.9
0.4
however, imports fell below the Others
previous year's figures for the Source: Ministry of Finance
first time in 32 months.
Fig. 2-9 Crude Oil Imports
China contributed strongly to 400
100
increased imports of semiconductors and
Quantity (million kiloliters)
90
US$ billions (right axis)
electronic components as locally based 350
US$ per barrel (right axis)
80

Japanese firms expanded production. 300
70
Imports of machines and equipment rose
250
60
9.3%, 7.2% and 8.5% in the first three
50
200
quarters, respectively.
40

150

05
(1
-1
1)
06

04

03

02

01

00

99

98

97

96

95

94

93

92

91

90

3) IT Trade: Production Shift Continues
IT exports increased 2.9% to $125.7 100
50
billion, while imports rose 5.5% to $78.9
billion. IT parts were key to these exports
0
increasing for the first time in two years.
Source: Ministry of Finance
Robust imports of both parts and finished
products enabled total IT imports to
exceed exports, reducing the trade balance by $500 million to $46.9 billion (figs. 2-10 & 2-11). The

Fig. 2-10 Japanese IT Exports (Jan.-Nov. 2006)
(US$ millions, %)
World
U.S.
EU25
China
Asia NIEs
ASEAN4
YoY
YoY
YoY
YoY
YoY
YoY
Final products
40,748 -3.3 12,469 -6.0 9,626 -7.8 4,290 20.4 8,260 -5.2 1,717 -2.8
6,509 -2.3 2,858
3.8 1,895 -7.9
423 -4.4
907 -5.1
93 -0.3
　Computers & peripherals
　
Office equipment
715 -35.9
211 -31.3
171 -38.2
105 -39.7
162 -34.9
19 -41.0

3,646 -9.8 1,488 -2.8
604 -25.2
220 -28.6
392 -18.2
216 32.6
　Communication equipment
14,307 -6.1 4,544 -15.0 4,478 -8.0
921 97.4 1,901 -11.2
296
3.0
　Video products
183 -41.2
69 -41.0
74 -41.4
1 -86.8
19 -40.4
1 -51.9
　Audio products
15,388
4.1 3,299
3.0 2,404
4.1 2,619 21.2 4,880
0.5 1,092 -8.1
　Measuring equipment
Components
84,982
6.2 11,640
3.9 12,630
5.7 16,291 17.2 28,315
0.1 10,912

2.8
14,387
0.3 4,158
0.7 4,212
3.2 2,320
7.5 2,112 -9.2 1,041 -14.3
　Computer components
3.7 2,811
9.9 3,483
0.3 7,133 20.6 17,002 -0.5 6,271 -0.8
　Semiconductor components 37,706
32,889 12.4 4,671
3.5 4,935 12.4 6,838 17.3 9,201
3.7 3,600 16.7
　Other electronic parts
Total
125,730
2.9 24,110 -1.4 22,257 -0.6 20,581 17.9 36,575 -1.2 12,629
2.0
Product definitions follow JETRO's White Paper on International Trade and Investment

18

30
20
10
0


Fig. 2-11 Japanese IT Imports (Jan.-Nov. 2006)

(US$ millions, % YoY)
World
U.S.
EU25
China
Asia NIEs
ASEAN4
YoY
YoY
YoY
YoY
YoY
YoY
Final products
33,905
1.3 5,878
9.3 2,972 -2.3 15,490
4.4 3,823 -6.3 4,582 -8.3
16,659 -2.7 1,435 -12.6
735 -13.0 9,635
3.0 2,101 -14.2 2,385 -1.8
　Computers & peripherals
364 -14.2
7 -32.3
4 -25.5
263 -15.8
59 -13.0
25 -1.9
　Office equipment
3,680 18.6

453 36.1
277
5.1 1,526 23.1
763 34.6
547
3.4
　Communication equipment
　Video products
3,511 -16.2
91 10.9
77 18.9 2,059 -8.1
390 -27.5
833 -32.3
　Audio products
898 -11.9
5 -20.1
3
1.8
703
2.1
27 -52.4
155 -40.1
8,793 15.7 3,887 17.7 1,875
0.9 1,304 31.4
483 20.8
636 21.9
　Measuring equipment
Components
44,972
8.8 6,430 14.5 1,826

8.2 12,547
6.2 15,857 15.4 7,051 -4.8
　Computer components
7,017 -9.0
693 -14.4
247 -12.2 3,345 -0.9 1,654 -23.3
801 -1.7
　Semiconductor components
23,159 19.6 4,358 21.4 1,004 22.8 2,000 26.3 11,624 27.0 3,662 -5.5
14,797
3.8 1,378 13.3
575 -2.3 7,201
5.0 2,580
5.9 2,588 -4.7
　Other electronic parts
Total
78,877
5.5 12,308 12.0 4,798
1.5 28,036
5.2 19,680 10.4 11,632 -6.2
Product definitions follow JETRO's White Paper on International Trade and Investment

Data from JETRO's White Paper on International Trade and Investment
Source: Ministry of Finance

19

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7-

10
-1

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4-

2

05
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7-

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4-

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04
/1
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9

7-

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6

4-

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/1
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growth in IT trade was due to increased sales of LCD TVs in connection with the Olympics in February
and World Cup soccer in June.
IT exports to China jumped 17.9% to $20.6 billion, followed by Mexico (up 43.3% to $29.0 billion).
Exports to China were up significantly for both finished products (up 20.4% to $42.9 billion) and parts
(up 17.2% to $16.3 billion). Semiconductors and electronic components accounted for the largest share
of the increase (up 20.6% to $71.3 billion), due to parts exports as Japanese production was transferred
to China. Japan exported key parts to North America for the assembly of IT finished products in Mexico,
but the large increase in exports to Mexico reflected increased production of LCD TVs by local Japanese
firms.
Negative contributions to IT exports included the U.S. (down 1.4% to $24.1 billion) and Asian NIEs
(down 1.2% to $36.6 billion). Since IT finished products were exported to the U.S. via Mexico and to
Asian NIEs via China, direct exports to these final destinations declined. The total value of Japanese
exports to Asian NIEs declined, since a large share of these exports were IT products (Fig. 2-2).
Leading IT exports were semiconductors and electronic components (up 3.7% to $37.7 billion) and
other electronic components (up 12.4% to $32.9 billion) (Fig. 2-12). IT parts exports rose 6.2% to $85.0
billion, the fourth consecutive annual increase. Expanding production offshore enabled exports to East
Asia to account for 65.3% of total IT exports, including China and Asian NIEs (up 0.1% to $28.3 billion)
and the ASEAN4 (up 2.8% to $10.9 billion). Imports of IT finished products from East Asia rose from
$11.4 billion in 1996 to $23.9
billion in 2006 (January to
(% QoQ)
Fig. 2-12 IT Exports by Commodity
November), a 2.1-fold increase.
40
Labor continued to be strategically
30
allocated through the export of parts
from Japan and the import of
20
finished products from East Asia.

The driving forces behind IT
10
imports were China (up 5.2% to
0
$28.0 billion) and the Asian NIEs
(up 10.4% to $19.7 billion). Imports
-10
Finished products
from China included both IT parts
Components
-20
Total
(up 6.2% to $12.5 billion) and IT
finished products (up 4.4% to $15.5
-30
billion).