Japan Regains its Position as a Global Cultural and Trend Leader

Japan Benefits from Increasing Economic Integration with East Asia

NEW YORK -- (BUSINESS WIRE) -- April 7, 2004

The Japan External Trade Organization New York (JETRO NY) released a newsletter today highlighting regional development in Japan. It can be viewed at:

http://www.jetro.go.jp/usa/newyork/focusnewsletter/focus33.html

Japanese Economy Continues to Show Signs of Recovery and Strength

Japan's GDP grew far more than expected during the last quarter of 2003 -- registering a 6.4% annualized growth rate. The Bank of Japan's last two tankan surveys provide further evidence business conditions are getting better. The outlook is also starting to improve for small- to medium-sized firms.
Corporate Restructuring Begins to Generate Positive Results

Japanese firms, particularly larger ones, are deleveraging debt and strengthening their balance sheets. They have begun to rationalize human resources, to sell or close unprofitable businesses, and to reduce their cost structures.

Japanese Economy Strengthened by Internal as Well as External Factors

Many observers think of Japan as an export-driven economy. But net exports contributed only 0.4 percentage points to Japan's real GDP growth during the final quarter of 2003. Business and capital investment during the last fiscal year grew at 5.1% in real terms.
There are Also Signs that Japanese Consumer Demand is Rising as Well

Consumer spending accounts for about 60% of Japan's GDP and last month household spending rose for the fourth straight month. Average spending by households of wage earners increased nearly 7% in February. Integrated retail sales data also jumped by .9% in February and real household expenditures by 1.3%, both on a year over year basis.
Japanese Economy Enhanced Through Stronger Economic Relations with East Asia

In 2003, East Asia accounted for nearly 50% of total Japanese exports. Since July 2001, Japanese exports to China have risen 117%, and to Association of Southeast Asian Countries (ASEAN) by 34%. Furthermore, the value of Japanese exports to China rose 33.8% in January compared to a year ago, while shipments to the U.S. fell 5.4%. In February, Japan registered its first trade surplus with China in more than a decade.
Japanese Firms Are Moving to Embrace the Challenges of Globalization and Asian Competition

The rise of Japanese exports to Asia reflects expanding economic cooperation within East Asia. From 1990 to 1998, general machinery part exports from Japan to China and ASEAN increased from $0.4 to $2.4 billion and $2.4 to 3.7 billion respectively. Electrical machinery part exports increased from $0.5 to $3.5 billion and $2.9 to 9.8 billion as well.

The Japanese government is moving to further strengthen regional relationships and to develop an East Asia Free Trade Agreement. Japan signed its first free trade agreement (FTA) with Singapore in 2002 and is now in serious talks with the Philippines, South Korea, Malaysia and Thailand.

Despite Substantial Progress, Japan Still Must Address a Range of Serious Problems

While the future looks brighter than a year ago, Japan needs to maintain its focus on a range of issues that could threaten its progress, including:

Non-performing Loans: The injection of public funds into Resona Bank marked a major turning point in efforts to clean up the Japanese banking system. The question moving forward, however, is whether Japanese banks will take the steps necessary to achieve the 50% reduction targeted by Japan's Financial Supervisory Service
by March 2005.
Consumption: Spending by Japanese households rose for a fourth consecutive month in February. Sales of stores in Tokyo rose .3% in February over the previous year and most major retailers are more confident about their prospects. While it is hoped these trends will continue -- it is too early to make definitive forecasts.
Unemployment: Last December's .3% dip in the unemployment rate to 4.9% marked the first improvement in 13 years and hopefully points to a trend that can be sustained. This is critical if Japan is to achieve a sustainable recovery. Nevertheless, job prospects, especially for younger workers, continue to remain problematic.
Globalization: While larger and world-class firms and major metropolitan areas are as a whole benefiting from a more global corporate structure and business environment, small to mid-sized companies and rural areas have found it far more difficult to make the necessary transition.

Investor Interest in Japan is Likely to Continue to Expand over Time

Japanese Equity Funds recorded their 18th consecutive week of inflows on March 27th and have pulled in $1.74 billion over the past four weeks, bringing the year to date total inflows to $3.11 billion. This 19% gain in 2004 is the highest among all fund categories.

This interest should not be surprising given that many Japanese firms remain a comparative bargain compared to their counterparts in the United States and Europe. Investors might also look at Japan within the context of the rapid growth now taking place in Asia. With established infrastructure, deep and liquid markets, lower volatility, an economy that is increasingly showing an ability to realize the benefits of restructuring and reform, Japan represents an opportunity that every internationally-focused investor - both financial and corporate -- should definitely consider as part of their agenda.

Data and statistics have been compiled by JETRO from publicly-released media accounts. JETRO does not guarantee their accuracy, and any such information should be checked by the reader before they are used to make any business or investment decision.

We would also like to inform you that Prime Minister Koizumi has started an English e-mail newsletter. Please click here to register:

http://www.kantei.go.jp/foreign/m-magazine/index.html.

Contact: Satoshi Miyamoto
Executive Director, JETRO NY
Tel: 212-997-0416
Fax: 212-997-0464
E-mail: Satoshi_Miyamoto@jetro.go.jp.