Japanese Economy Remains Strong After Record 2005 Performance

Business/Government/Assisgnment/Editors

New York, New York - Feb. 1, 2006 - The Japan External Trade Organization New York (JETRO NY) released a newsletter today highlighting recent strength and trends in the Japanese economy. It can be viewed at:

http:///www.jetro.org/focus

A summary is presented below:

• Japan Proved a Source of Eye-Catching Returns for Investors in 2005

The Japanese stock market had a remarkable run in 2005, with the Nikkei 225 alone recording a 40 % increase in yen terms, its best performance since 1986. Not only did this market perform extremely well in absolute terms, but it also exceeded those of other developed economies.

• Japan’s Economy Ended 2005 on a Strong Note

One extremely important theme that emerged in 2005 was the stabilization or slowing of deflation. On the banking front, end-of- the year data was also positive. Other bright spots include stronger industrial activity and greater consumer as well as business confidence and spending.

• Transformation of Japanese Corporate Sector is Creating Virtuous Cycle

Facing lean economic times as well as severe overseas competition, Japanese companies have moved to transform themselves. They have reduced debt, downsized their workforces, and closed plants that no longer bolster the bottom line. The Japanese banking sector also has been consolidating.

Increased profitability coupled with strong exports and an improving domestic situation has given Japanese businesses newfound incentives to invest, which they have embraced with gusto. Capital spending surged by 9.6% in the third quarter year-on-year, the tenth straight quarter of expansion. Japanese firms have been investing not only in plant, property, and equipment, but also in R&D.

• Profits also Serve as a Catalyst for M & A Activity

Coupled with strong share prices and shareholder pressure, profit growth is also encouraging Japanese firms to make acquisitions. In 2005, the value of Japanese M&A surged to $167.6 billion, representing a 100%+ increase year-on-year.

• Strong Corporate Performance is Bolstering Hiring, Wages, and Consumer Spending

Companies are now reported to be more willing to employ full- time versus part-time workers. As a result, college graduates face the best job market in a decade. Furthermore, the job-to-applicant ratio in October rose to its highest level in almost 14 years. Winter bonuses grew by 3.5% in 2005 over the prior year. This was the biggest gain in 14 years.

• Japan Continues to Pursue Necessary Policy Changes

Many commentators were pleased by Japanese Prime Minister Koizumi’s massive electoral victory on September 11 when the Liberal Democratic Party won an outright majority in the lower house of the Japanese Diet. In addition to plans to totally privatize Japan’s $3 trillion Japan Postal Savings System by 2017, the Japanese government is also moving to cut state spending and implement many other reforms.

An investigation into the activities of Livedoor, an Internet portal company, in regard to suspected market irregularities, unsettled both foreign and domestic investors this month. Notwithstanding the circumstances surrounding this particular incident, investors with a long-term perspective understand the importance of investigations of this kind. They serve to both hinder fraud and to provide a framework that develops precedents, case law, rules-based guidance and public debate.

• Domestic Investors Drive Further Growth in Japanese Stock Indices

There are signs that Japanese investors are becoming more willing to assume risk. This is encouraging, and more bullish fund managers, believe this trend will accelerate as pension funds gravitate to the improving returns and the accelerating pace of corporate buy-backs, restructuring announcements and other positive developments.

• The Odds Favor Continuing Economic Growth for Many Years to Come

While additional consolidation is a distinct possibility, this would only serve to help sustain the progress that has been achieved and would not disturb the underlying positive trend. It will also allow entry for a new group of investors who have been waiting for a better buying opportunity.

Data, statistics and the reference materials presented within this newsletter have been compiled by JETRO from publicly- released media and research accounts. Although these statements are believed to be reliable, JETRO does not guarantee their accuracy, and any such information should be checked independently by the reader before they are used to make any business or investment decision.

For additional information on economic and financial trends in Japan, please contact:

JETRO New York
Akihiro Tada
Executive Director
email: akihiro_tada@jetro.go.jp
tel./fax +1-212-997-0416/+1-212-997-0464

This material is published and disseminated by JETRO New York, in coordination with KWR International, Inc., New York, NY 10016, Tel: 212-532-3005, Fax: 212-685-2413, E-mail: kwrintl@kwrintl.com. JETRO New York is registered as an agent of the Japan External Trade Organization, Tokyo, Japan and KWR International, Inc. is registered on behalf of JETRO New York. This material is filed with the Department of Justice where the required registration statement is available for public viewing.