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Although the economy is now in its fifth-longest expansion in postwar history, the outlook is clouded by worries over the future course of the digital industry and personal consumption.

Sony Corp. President Kunitake Ando is confident about the digital industry, apparently buoyed by brisk sales of digital consumer electronics in August due in part to the strong performance of Japanese athletes in the Athens Olympics.

However, industry watchers remain concerned about the outlook for the high-tech industry.

For one thing, the domestic inventory ratio of semiconductors has risen sharply. For another, Intel Corp., a leading U.S. semiconductor manufacturer, has revised its earnings forecast downward.

“If overseas economies slow down, it would be difficult for Japanese industry to adjust production to address slower demand,” said Koichi Haji, chief economist at NLI Research Institute.

Industry watchers have haunting memories of the sharp decline in stock prices in 2000 that was triggered partly by sluggish performance in the IT industry.

The Nikkei stock average remains below this year’s closing high of 12,163 posted April 26.

Another factor putting downward pressure on the economy is growing signs of a slowdown in consumer spending that has so far led the recovery.

Sales at department stores and supermarkets were expected to post a sharp increase this summer due to the record-breaking heat wave.

However, sales in July and August were down from a year earlier.

“We can no longer expect strong sales of cold beverages and foods simply because of summer,” said Toshifumi Suzuki, chairman and CEO of Ito-Yokado Co.

“The heat wave had only a limited effect in boosting sales,” said an official at the Cabinet Office.

Meanwhile, household income is erratic, with wage differentials widening, depending on the size of the corporation and industry.

According to a survey by the Japan Business Federation (Nippon Keidanren), summer bonuses at major corporations this year hit a record high, posting an increase of 2.85 percent from a year earlier.

However, a survey by the Health, Labor and Welfare Ministry covering regular and part-time workers at small and midsize businesses shows that the average bonus paid in July fell 0.1 percent from a year earlier, posting a year-on-year decrease for the second consecutive year.

Japan Research Institute estimates that the increase in individual contributions to employees’ pension insurance, which took effect Friday, will reduce consumer spending by 0.2 percent in fiscal 2005.

The private think tank also says that if the income and resident tax cuts, which have been in place since fiscal 1999, were reduced by half, it would further drive consumer spending down by another 0.65 percent.

The outlook for the U.S. and Chinese economies is also a cause for concern.

With gasoline prices rising and the benefits of tax cuts dwindling in the United States, a slowdown of the economy there would weigh on the Japanese turnaround.

There are already rumors that China may shift to a tighter monetary policy to prevent the economy from overheating.

“Should the Chinese economy slow substantially, it would have a far-reaching impact on the Japanese basic materials industry,” said Kazuo Ueda, a member of the Bank of Japan’s Policy Board.

Some observers have begun to compare the current situation to the 1997-1998 period, when an economic recovery fell through due to an increase in the consumption tax.

However, no viable measures to ease the downward pressures have been worked out.

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