The economic outlook for Japan in 2008 is not bright. The Japanese economy faces a variety of factors that are likely to place a drag on its growth, such as the steep rises in oil prices and the expected slowdown of the U.S. economy due to the subprime mortgage crisis. In fact, the Organization for Economic Cooperation and Development has predicted that Japan's economy would grow by 1.9 percent in 2007 and 1.6 percent in 2008, downgrading its previous growth forecasts of 2.4 percent for 2007 and 2.1 percent for 2008.
The high oil prices not only pushed up the prices of gasoline and kerosene but also increased demand for bioethanol, resulting in worldwide grain price rises. Price rises are also seen in foodstuffs, electricity and gas as well as in raw materials for business enterprises. High prices have heavily affected the lives of low-income people called the "working poor." Smaller enterprises have difficulty in passing the rises in the prices of raw materials on to the prices of their products.
In December, in an attempt to minimize the effect of the subprime mortgage crisis, the Bush administration of the United States announced a plan to freeze interest rates for up to five years for a maximum 1.2 million homeowners who bought houses with subprime loans and the U.S. Federal Reserve lowered the federal funds rate, a key short-term rate, by a 0.25 percentage point — a third rate cut following the cuts in September and October — to 4.25 percent. The accumulated cut since September is one percentage point. But the scope of the subprime crisis is still unclear and the problem is likely to continue to destabilize the world economy for some time.