JAPAN

GENERAL ECONOMIC SITUATION OF JAPAN - 2001

The Japanese economy peaked in October 2000. It has been deteriorating since then, and the serious situation remains unchanged. Japan's real growth rate for January-March 2001 reached a positive 1 percent. However, subsequently the growth rates for April-June and July-September fell by negative 1.2 percent and 0.5 percent, respectively. Forecasts made by the government and private institutes indicate that the real growth rate for fiscal 2001 (April 2001-March 2002) will be negative 1 percent.

Major reasons for the recession are the decline in both domestic and overseas demand such as the worldwide shrinkage in demand for IT-related equipment and a drop in exports affected by the economic slowdown of the United States. In addition to decreases in demand, increases in cheap imported merchandise made domestic production shrink, the prices of commodities dropped, and corporate earnings have worsened in turn. The production index in 2001 went down by 7.9 percent from the previous year, the largest fall since 1975.

Corporations have been promoting restructuring such as production curtailments, shutting down unprofitable departments and moving mills overseas. Enforcement of restructuring has caused personal consumption to decrease due to the increase in unemployment and decrease in personal income.

Disposal of non-performing bad loans by financial institutions are behind schedule and have prevented economic recovery. The Bank of Japan has been taking an easy-money stance, and the government has also been promoting structural reforms such as an easy-money policy and has applied a supplemental budget of some 3 trillion yen mainly for unemployment. However, no positive effects have been brought about yet.

Table 1 shows that real economic growth for fiscal 2002 estimated by the government is zero. On the other hand, the average growth rate estimated by private institutes indicates a negative 0.7 percent.

Table 1: Forecast of real GDP and related indicators by government

	2001 fiscal year (%)	2002 fiscal year (%)
Real GDP	-1.0	0.0
Private consumption	-0.9	0.2
Non-residential investment	1.6	-3.5
Residential investment	-8.4	-1.9
Government consumption	2.9	2.4
Public investment	-5.2	-1.3
Exports of goods and services	-9.7	-0.3
Unemployment rate	5.2	5.6
Index of industrial production	-10.2	-2.4
Wholesale price index	-1.1	-0.8

Performance of the paper industry - 2001

Consumption, production and trade

Reflecting the economic slowdown, paper and paperboard consumption fell by 2.8 percent from the previous year as illustrated by the following major trends:

• Consumption edged up by 0.2 percent for the first half of 2001. However, it went down drastically by 5.8 percent for the rest of the year mainly because the economy deteriorated and users made inventory adjustments for the latter part of the year.

• By grade, consumption of almost all grades decreased from the previous year except newsprint, which increased marginally. It is pointed out that advertisements in newspapers for the earlier part of the year maintained positive growth and newspaper companies increased the number of pages by providing fuller and richer contents.

• Consumption of printing and communication papers, the largest paper sector, decreased by 3.4 percent from the previous year being greatly affected by the drop in coated paper. Consumption of coated paper, which has never decreased even in past recessional periods, fell by 4.7 percent from the previous year. The decrease in consumption of printing and communication paper occurred because the corporate advertisements reduced due to the serious recession, and the demand for manuals of personal computers and cellular phones fell due to the IT-related recession.

• Paperboard consumption decreased by 3.1 percent in 2001. The drop rate was very marginal considering the decrease by about 8 percent in industrial production the previous year, which is closely related with paperboard demand. One of the reasons that this marginal decrease in paperboard consumption remained at a 2.7 percent drop was that the largest demand for paperboard comes from the steady demand from the food processing sector.

Table 2: Supply and demand in 2001

Source: Ministry of Economy, Trade and Industry; and Ministry of Finance

Total paper and paperboard production decreased by 3.4 percent in 2001, and decreased as much as 5.5 percent from the previous year for the latter part of the year in particular. Two reasons for this decrease were a great fall in consumption and the revision of the overstocked level to normal in the middle of the year. Because of these effects of reduction in production, manufacturers' inventories have been reduced since last summer.

Estimated operating rate of paper and paperboard fell to 90 percent or less in 2001, 3 percent less than that of 2000. However, growth in Japan's production capacity has slowed down greatly because almost no start-ups of large paper machines have been scheduled since the recession in 1998 and because shutdowns of mills have been implemented.

Imports of paper and paperboard increased by about 8 percent in the first half of 2001 from the previous year. It is believed that the contracted tonnage made in 2000 when the domestic demand boomed has been unloaded. However, imports decreased in the second half of the year, being affected by the deterioration of consumption.

Exports have been sluggish in general. The Asian economy slowed down greatly and profitability of manufacturers has worsened due to the drastic price decrease in international trade. The only exception was newsprint exports which jumped by 28 percent.

Financial performance

Performance of the 17 listed paper and paperboard companies for April-September 2001 shows that sales decreased by 3.4 percent, recurring profit decreased by 57.5 percent, and net profit posted a -866 million yen decrease mainly because both production and sales decreased and most paperboard-oriented manufacturers in particular have reduced tonnage and suffered from a great drop in pricing. All of this attributed to manufacturers' negative profitability as a whole.

Table 3: Consolidated results of the 17 listed paper companies

	April-September 2001 (actual)		April 2001-March 2002 (forecast)
	million yen	% change	million yen	% change
Sales	2 041 144	-3.4	4 159 380	NA
Recurring profit	37 677	-57.5	92 450	-53.8
Net profit	(866)	NM	15 990	NM

Outlook

The Japan Paper Association has forecast that the growth of domestic demand for paper and paperboard will be down 0.9 percent for 2002 from the previous year. The largest reason for the negative growth is the delay in the recovery of the economy.

The business climate for the first half of 2002 seems to continue to be severe. However, there will be some grades which will improve for the second half of the year. If the economic growth for the year is negative, that would be the second year in a row.

Table 4: Domestic demand forecast by main grade - 2002 (%)

     Source: Japan Paper Association

ISSUES OF PARTICULAR INTEREST - ENVIRONMENTAL ASPECT

In accordance with the decision made by CoP7, the government has been seriously coping with preparations and construction for domestic systems. In January 1997, as concrete measures for preservation of the environment, the Japan Paper Association designed "Voluntary Action Plan on Environmental Issues" (revised in September 1999 and January 2001), which includes measures preventing global warming, and has been actively promoting the achievement of its target. The contents of the voluntary action plan and its current status are as follows:

• by 2010, reduce the unit of purchased energy for products by 10 percent compared to that of 1990 (reached a 7.2 percent reduction in 2000);

• by 2010, expand tree plantation land to 550 000 hectares, domestically and overseas (expanded to 410 000 hectares in 2001);

• by 2005, raise the utilization rate of recovered paper to 60 percent (increased to 58.0 percent in 2001); and

• by 2010, decrease final disposal of industrial wastes (2 540 000 tonnes in 1990) to 450 000 tonnes (reduced to 610 000 tonnes in 2000).