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Fri, Jul 23, 2004 - Page 12 News List

Japan heats up, nearly doubles forecast

SHARP UPTURN While economic growth is expected to continue for much of the remainder of this year, analysts expect it to slow down next year


A Japanese man buys a spicy Asian curry dish from a van vendor during lunch hour in Tokyo yesterday. The government on Wednesday spiced up the market by releasing its forecast for Japan's economic growth early -- and predicting it would grow to 3.5 percent for the year ending next March.


The Japanese government on Wed-nesday nearly doubled its forecast for the nation's economic growth to 3.5 percent for the year ending March next year, the result of a sharp upturn in business investment and increased consumer spending.

The new outlook is in line with forecasts by private economists, and, if achieved, would be Japan's fastest growth since 1997, when the economy expanded 3.6 percent. The Cabinet office of Prime Minister Junichiro Koizumi had previously forecast the economy would grow 1.8 percent in the current fiscal year.

The Cabinet office also said, however, that it expected growth to slow to "slightly more than 2 percent" in the following fiscal year, which ends in March 2006. That forecast is also roughly in line with the views of private economists, most of whom expect Japan's expansion to decelerate as corporate investment slows and China's torrid economic growth continues to cool. Japan's economy is closely tied to China's and therefore vulnerable to any slowdown there.

The government broke with tradition by offering a revision to its economic forecasts so early in the fiscal year, but after two quarters of surprisingly strong growth, the government's forecasts had begun to look unrealistically low. Generally, the Cabinet office has released its economic forecasts in the fall. Wednesday was also the first time the office made projections for the following fiscal year.

Japan's GDP grew at an annual rate of 6.1 percent for the quarter ended in March as consumer demand -- the missing element from previous short-lived recoveries -- rebounded, adding to already strong exports and business investment.

In its new forecast, the Cabinet office said it expected rising business investment to continue to make a big contribution to overall economic growth.

Capital investment by companies was expected to rise 9.9 percent in the current fiscal year, while consumer spending was anticipated to be up 2.6 percent.

"Amid a global economic recovery, the rise in production and capital investment continues and now is expected to broaden to the household sector," the Cabinet office wrote in a brief report accompanying its forecasts.

The report forecast that government investment would shrink 12.5 percent for the fiscal year, in line with a promise by Koizumi's government to rein in the growing budget deficit.

As Japan shows unexpected economic vitality, few economists seem to doubt the country will meet the growth estimates for the current fiscal year. And so, economists are turning their attention to 2005-2006.

Although consumer spending has recently begun to pick up, the main driver of Japan's two-year-old economic recovery continues to be growth overseas, particularly in the US and China. Strong demand for Japanese electronic goods such as cellphones, flat-panel TVs and DVD players has driven an investment binge by manufacturers.

While business investment is expected to continue for much of the remainder of this year, many economists doubt it will last into next year.

"We believe we are getting toward the end of the expansion," said Robert Feldman, chief economist for Morgan Stanley in Tokyo.

Also, any cooling in China's growth will reduce investment by Japanese companies that have been benefiting from China's rapid expansion in recent years, he added.

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