The Japanese economy is expected to grow about 1.7 percent in real terms in fiscal 2016 starting next April, led by recovering consumer spending and solid capital investment, the government said Tuesday.
In nominal terms, gross domestic product will likely expand around 3.1 percent in the next fiscal year to around ¥518.8 trillion ($4.3 trillion), the highest level in 19 years since fiscal 1997, when GDP totaled ¥521 trillion.
The projected GDP will surpass ¥513 trillion marked in fiscal 2007, before the financial crisis triggered by the collapse of investment bank Lehman Brothers Holdings Inc.
According to the forecast approved by the Cabinet of Prime Minister Shinzo Abe, overall growth is expected to be boosted by around 0.3 percentage point due to increased demand prior to the planned consumption tax rate hike in April 2017 from 8 percent to 10 percent.
The projection also takes into account the effects of a recently compiled extra budget aimed at bolstering the economy through enhanced welfare services and a more competitive farm sector, which is expected to lift GDP by 0.4 point in fiscal 2016.
The overall growth forecast is more optimistic than that of the Bank of Japan, which projected real GDP growth of 1.4 percent for fiscal 2016 in late October.
As for inflation, the government expects consumer prices to rise around 1.2 percent in fiscal 2016 from a year earlier, still short of the 2 percent inflation target set by the central bank, due largely to declining crude oil prices.
The Cabinet Office warned of downside risks including a downward swing in emerging markets, including China, as the U.S. Federal Reserve has started normalizing its monetary policy by raising interest rates, a move that could cause capital outflows from such markets.
Meanwhile, the office said the Japanese economy is expected to expand 1.2 percent in the current fiscal year, downgraded from 1.5 percent growth estimated in July, as the slowdown in emerging markets has hurt exports and delayed a recovery in capital investment.
Private consumption also remained weaker than expected, according to the office.
The growth forecasts will be used for the government’s tax revenue estimates, a basis for its new budget compilation. The Cabinet plans to approve the fiscal 2016 budget Thursday.