The Japanese government forecast on Monday that economic growth would slow to 1.6 percent next fiscal year from 2.1 percent, but it said it was making progress on ending deflation. Alongside that real, price-adjusted growth forecast for gross domestic product (GDP), the government said nominal growth in fiscal 2005/06 starting next April was expected to be 1.3 percent, up from 0.8 percent.
Economics Minister Heizo Takenaka said the economy was on track to meet the government's target of achieving 2 percent nominal growth in 2006/07.
The government forecast that the consumer price index (CPI) would rise 0.1 percent in fiscal 2005/06, the first positive forecast since fiscal 2000/01.
Deflation has plagued the country for more than five years, prompting the Bank of Japan to adopt a "quantitative easing" monetary policy under which it floods the money market with liquidity, effectively keeping short-term interest rates at zero in an attempt to spur economic activity.
Movements in consumer prices are closely watched as the central bank has promised to maintain its easy policy until year-on-year changes in the core CPI, which excludes fresh food prices, stabilise above zero.
But the Cabinet Office was cautious about whether deflation would be eradicated next year.
"Our forecast is positive, but it is a small positive figure," a Cabinet Office official said. "Our judgement on deflation is based on various price indicators."
The GDP deflator, which is used to obtain real GDP growth by subtracting price inflation from nominal growth, is forecast at minus 0.3 percent for fiscal 2005/06, compared with a forecast of minus 1.3 percent in fiscal 2004/05.
About half of the 1.3 percent fall in the deflator for 2004/05 was due to a sharp rise in crude oil prices, another official said.
Under the previous method, real GDP growth was forecast at 2.8 percent for fiscal 2004/05.
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