Japan will see the end of deflation and achieve slight positive growth in fiscal 2003, when the government's structural reform programs and the Bank of Japan's credit-easing steps begin to take effect, a key government panel said Friday.

The Council on Economic and Fiscal Policy, which is chaired by Prime Minister Junichiro Koizumi, said in a midterm fiscal and economic report that consumer and wholesale prices will rise in fiscal 2003.

The economy will return to steady, private sector-led growth in fiscal 2004 if the ongoing structural reforms pursued by Koizumi fully take effect, according to the report.

The outlook sees positive economic growth in both nominal and real terms in fiscal 2003, although such growth would remain fragile.

Beginning in fiscal 2004, however, the economy will be able to secure nominal growth of at least 2.5 percent and real growth of at least 1.5 percent as private demand picks up and becomes the driving force of growth, the report says.

The economic and fiscal development scenario covers a five-year period between fiscal 2002 and fiscal 2006 -- starting April 1 and running until March 2007.

The outlook, expected to be approved by the Cabinet next week, charts a course of government efforts to bring the ailing economy back to a sustainable growth track through structural reform initiatives.

All these prospects, however, are based on the assumption that the Koizumi administration's structural reforms will successfully halt the current deflation and revitalize the private sector, which, as the report admits, "will take a certain period of time before taking effect."

The report, therefore, calls fiscal 2002 and 2003 an "intensive adjustment period," during which the economy will probably suffer nearly flat growth.

The report underscores the need for the government and the Bank of Japan to take every step to combat deflation so that prices can turn up at the end of the two-year adjustment period. It also calls for ending the problem of banks' nonperforming loans in three years.

Drawing a better picture for fiscal 2004 and beyond, the outlook reckons Japan will become more innovative and competitive in various industrial fields.

After the bad-loan problem is resolved, firms' capital investment will pick up and more business ventures will come to life, revitalizing the entire corporate sector, the report figures.

The report also says Japan's current focus on environment-related technology, information technology and nanotechnology will provide greater business opportunities in the medium term.

In addition, Japan will be able to accommodate a larger number of women and elderly in the workforce if the ongoing efforts to revitalize the labor market succeed, it says.

On the fiscal side, the outlook boasts the long-term goal of bringing Japan's distorted public finances back to normal by achieving a "surplus in the primary balance in the early 2010s."

The primary balance is a gauge of a government's fiscal soundness that shows state expenditures and revenues, excluding bond revenues, as well as interest and principal repayments on bonds.

A primary balance surplus means the government has tax revenues sufficient to finance public services.

To this end, the government should work to reduce the current primary balance deficit by further promoting deregulation and structural reforms to spur economic growth led by private-sector demand, the report urges.