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Japan raises growth forecast
Government says economic recovery is being driven by improved corporate earnings.
Last Modified: 22 Jun 2010 07:22 GMT
Japan's growth will continue to be hampered by soaring debt levels and high unemployment [EPA]

Japan has raised its growth forecast for the current fiscal year to 2.6 per cent, almost double its previous projection of 1.4 per cent, in an effort aimed to decrease its debt levels, which are highest in the industralised world.

The government said on Tuesday that it would see Japan achieve GDP growth of more than two per cent
for the first time since 2006.

"Thanks to the government's stimulus packages, strengthening in business profitability and improvements in employment and household income are spreading to an increase in private demand," the Cabinet Office said.

"If this cycle continues, Japan's economy is expected to go on a track towards an autonomous recovery."

The government also said that economic recovery is being driven by improved corporate earnings as well as an increase in exports to Asia. 

The region alone accounts for over 50 per cent of Japanese exports.

The country's economy has emerged from last year's recession - the worst since World War II - thanks to a recovery in exports, which alone account for 10 per cent of Japanese Gross Domestic Product (GDP).

Earlier in the month, the government upgraded its economic growth in the January-March quarter to an annualised pace of five per cent from 4.9 per cent in a preliminary report.

Tax hike

But the encouraging figures, including Tuesday's upward GDP revision, are tempered by persistent deflation and soaring debt.

On Tuesday, Tokyo set ambitious targets to rein in its debt but admitted it would not be met even under a positive growth scenario, setting the stage for politically contentious tax hikes.

Naoto Kan, the prime minister has made fiscal reform a top priority ahead of a July 11 upper house election, vowing to consider doubling the five per cent sales tax, although not for at least two or three years.

The government is hoping to keep the support of investors longer term and avoid a credit ratings downgrade with a fiscal strategy.

"We must prevent a situation like Greece, where Japan loses the confidence of bond markets, pushing interest rates higher and leading its finances into a state of collapse," government officials said.

However, the plan lacked specific ideas of how to meet its long-term aim of achieving budget balance targets and reducing its debt-to-GDP ratio - now estimated at nearly twice the size of GDP - the worst in the developed world.

In the fiscal plan, the government pledged to keep new debt issuance in the year to next March at or below about the $483bn that has been earmarked for this year, while aiming to steadily reduce bond issuance thereafter.

To achieve this, the government said it will halve Japan's primary budget deficit - now estimated at $338bn, or 6.4 per cent of GDP - by the fiscal year from April 2015.

But the Cabinet Office estimated that neither the budget balance nor the debt-GDP ratio goals could be met under the government's growth strategy, which calls for an average 2 per cent real growth by fiscal years 2020-21.

Source:
Agencies
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