Japan's Medium-term Economic Outlook -January 2012-

◆We have revised our June 2011 medium-term outlook for Japan's economy. After downgrading the growth rate of the world economy and factoring in the government’s reconstruction policies and draft proposal for the integrated reform of the social security and tax systems, we now forecast that Japan's economy will grow 2.4% (nominal) and 1.8% (real) over the next 10 years (annualized average trend rates).

◆Rather than actual level, what has become problematic with respect to currency rates is the fluctuation that far exceeds changes in economic fundamentals. Excessive fluctuation in market exchange rates not only directly worsens Japan's economy but also has the indirect but still major adverse effect of restraining the growth of nominal wages as companies seek to maintain export competitiveness. To roll back the overly strong yen, measures that take a long-term view are needed. Specific steps that could be taken are rules to control excessive fluctuation accompanying a floating exchange rate system and Japan's manufacturers endeavoring to make products whose selling prices do not fall and developing sales methods where price reductions are not necessary.

◆Electricity shortages resulting from the halt of nuclear power plants have mainly been met by curbing the demand of large-volume electricity users and by increasing the operating rate of thermal power plants. Such measures, however, have been accompanied by subdued corporate activity and upward pressure on electricity prices. To mitigate these effects, it will be necessary to implement comprehensive measures, including restarting nuclear power plants that have met high safety standards, further reducing household demand for electricity through market mechanisms and smart grids, and establishing reasonable and highly transparent purchase prices for electricity generated through renewable energy sources.

◆As the fiscal problems of governments deepen worldwide, it is very significant that a proposal has been drafted for the integrated reform of the social security and tax systems, which includes a specific plan for increasing the consumption tax. While we can agree with the philosophy behind the draft proposal, cuts to existing benefits are inadequate, and the examination of many issues has simply been postponed to the future. Whether conditions for raising the consumption tax rate will actually fall into place is a prospect that will bear watching.