Japan's Medium-term Economic Outlook -June 2011-

◆We forecast that Japan's economy will grow at an annualized average of 1.8% (nominal) and 1.5% (real) over the next 10 years. Per capita real GDP, a measure of average living standards, will rise 1.9%. Viewed from the supply side, the economy will achieve an increase of 2.0% in man-hour productivity.

◆Focusing on structural deflation caused by corporate activity, the efforts of manufacturing industries to reduce labor costs and to increase price competitiveness in foreign markets have given way to the appreciation of the yen, deflation, and lackluster domestic demand. To surmount deflation and to achieve sustainable growth, it will be important to increase productivity by easing regulations and creating a better employment environment. Equally significant will be the establishment of a framework for distributing domestically the increase in income derived from higher productivity.

◆As measures for dealing with power shortages following the nuclear power plant incident triggered by the Great East Japan Earthquake, gas-fired power generation using LNG with relatively low CO2 emissions should be increased in the short term. In the medium to long term, geothermal power, small and micro hydropower, and other sources of renewable power generation should be promoted and solar and wind power generators built in suitable locations. Such prioritization should be established by broadly referring to the time cost and economic cost of increasing supply capacity as well as the environmental burden.

◆We have assumed in this current forecast that the consumption tax will be increased from its current rate of 5% to 8% in FY14 and to 10% in FY15 as part of the integrated reform of the social insurance and tax systems. A higher consumption tax would reduce demand and blunt economic growth in the short term. However, in view of the hyper-aged society that Japan is becoming, some increase in the taxpayer burden is unavoidable and the economy may well be able to withstand the consumption tax increasing by the order we have described. Since the objective of raising the consumption tax is to ensure the sustainability of the social insurance system, the taxpayer burden should not be increased unless social insurance benefits are at the same time made more efficient.