The Current Economy and Medium-Term Growth Prospects Summer 1999 brought several indications that the recovery is slowly starting to gather momentum. Public investment, the zero interest rate policy, and an easy lending stance backed by government credit guarantees has clearly had an effect. Full-scale private sector restructuring has also helped put corporate profits back on an uptrend and this is having a major macroeconomic impact. The authorities have recognized that the rejuvenation of industry at the microeconomic level is necessary for revitalization at the macroeconomic level, which has led them to combine traditional demand stimulus policies with efforts to make business more competitive through, for example, the Law on Special Measures for Industrial Revitalization. But when will the economy start to recover under its own steam and what is the medium-term growth trajectory? Under given conditions, we would expect real GDP to grow at 0.9% in FY99, increasing to 1.9% in FY00 as the economy enters a self-sustained growth path. We would also expect actual growth to exceed the potential rate of growth fromFY01 onwards. These conditions relate to the policy measures that would need to be implementedwithin a macroeconomic context of ongoing structural reform designed torevitalize Japanese industry. Our medium-term forecast is based on the assumption that the authorities will give priority to self-sustaining economic recovery and maintain their ultra-easy monetary policy stance at least through 2000. The zero interest rate policy is not a necessary condition for economic recovery but until such time as private demand takes over from public demand, and most particularly until such time as private capex starts to pick up in earnest, we expect the ultra-easy monetary stance to be maintained. We assume the government will not reassign priority away from economic recovery back to its fiscal consolidation program for the time being, althou...