GROSS DOMESTIC PRODUCT

The Japanese economy is now on track for modest recovery. In fiscal year (FY) 1999 (April 1999-March 2000), real gross domestic product (GDP) grew by 0.5 percent, following two consecutive years of contraction of the economy (¨C0.1 percent in FY1997 and ¨C1.9 percent in FY1998). (On a calendar year (CY) basis, real GDP increased by 0.2 percent in 1999 from a ¨C2.5 percent in 1998). Real GDP grew by 1.0 per cent in the second quarter of 2000 compared to the previous quarter.

Two factors contributed to this modest economic recovery: stimulative macroeconomic policies in 1998 and 1999, and the rebound in Asian economies. Public investment recorded a positive growth for three consecutive quarters (compared to the previous quarter) beginning the fourth quarter of 1998, which underpinned the recovery, but posted a negative growth since the third quarter of 1999. Overall, real public investments decreased by 0.9 percent in FY1999. Exports have also been increasing, especially those to Asia, as the Asian economy has recovered rapidly from recent Asian Financial Crisis. In FY1999, total real exports of goods and services increased by 6 percent. (Growth for exports of goods and services based on CY 1999 is 1.9 percent).

Due to these factors, positive signs for economic recovery have begun to be observed in some fields of economic activities, especially in business activities.

Although real private non-residential investment decreased by 2.3 percent in FY1999, the decline seems to have bottomed out. The number of firms that take positive action such as increasing the amount of fixed investment is increasing gradually, especially in high-growth sectors.

Regarding consumers¡¯ activities, private consumption remained weak because of falling real earnings and uncertainty about employment prospects as it recorded negative growth in the third and fourth quarters of 1999. It then recovered in the first quarter of 2000 and recorded a 1.2 percent increase (in real terms) for the entire FY1999.

INFLATION

Reflecting the sluggishness of private consumption, previous yen appreciation, large decline in fresh food prices and effects of deregulation, the rate of increase in the consumer price index (CPI) has been very stable. CPI dropped by 0.5 percent in FY1999 (¨C0.3 percent on CY 1999) and is expected to rise by around 0.3 percent in FY2000. Domestic wholesale prices hit the bottom of the downward trend in FY 1999 but has remained almost at the same level since then due to price increases in the international commodity market, including for crude oil and to progress in inventory adjustment. Domestic wholesale price index (WPI) dropped by 1.0 percent in FY1999 and is expected to drop by around 0.1 percent in FY2000.

EMPLOYMENT

The prolonged economic slump had serious impacts on the labor market, raising the level of unemployment and putting downward pressure on wages. Unemployment rate has remained high throughout FY1999 and recorded a historical high at 4.9 percent in February and March 2000. The number of the employed decreased by 0.5 percent and the unemployment rate rose to 4.7 percent in annual average in FY1999.

Although conditions in the job market indicate that labor adjustment pressures remain strong, the unemployment rate in FY2000 is expected to decline slightly to the level of 4.5 percent as a result of economic recovery. Thereupon, the number of the employed is expected to increase by 0.4 percent.

BALANCE OF PAYMENTS

Exports and imports, especially those to and from Asia, are increasing. In FY1999, real exports of goods and services increased by 6.0 percent and real imports increased by 8.8 percent. Current account surplus decreased from 15.2 trillion yen (3.1 per cent of GDP) in FY1998 to 12.6 trillion yen (2.6 percent of GDP) in FY1999.

In FY2000, real exports are expected to increase by 3.8 percent while real imports are expected to increase by 3.7 percent. The current account surplus is expected to decline slightly to 11.4 trillion yen (2.3 percent of GDP) in view of the faster increase in import values than export values as a result of higher oil prices.

Capital account deficit decreased significantly from 16.8 trillion yen in FY1998 to 4.3 trillion yen in FY1999.

Foreign direct investment (FDI) outflows from Japan increased by 42.6 per cent from 5.2 trillion yen in FY1998 to 7.4 trillion yen in FY1999 while the FDI inflows to Japan went up significantly from 1.3 trillion yen in FY1998 to 2.4 trillion yen in FY 1999 for a 74.5 percent increase, reflecting a rapid growth of M&As (mergers and acquisitions).

TOTAL EXTERNAL ASSETS

Following the historical high of 133 trillion yen in calendar year (CY) 1998, net external assets decreased to 85 trillion yen in CY1999. Gross external assets amounted to 308 trillion yen while gross external debt registered at 223 trillion yen in CY1999.