JAPAN

1. GENERAL ECONOMIC SITUATION - 2002

Japan's economy continued to be sluggish and marked a negative growth of 1.4 percent in fiscal 2001 (ending 31 March 2002). The Japanese economy, however, for the time being bottomed out early in spring 2002 thanks to developments in inventory adjustments and to increases in production and exports supported by the recovery of overseas demand. The economy has been moving in a favourable direction since then, and a coincidence index reflecting the economy has exceeded the turning point of a 50 percent level for the ninth consecutive month for the February - October period. Real GDP growth also marked 0.9 percent in the April-June growth and 0.8 percent in the July-September quarter over the first and second quarter in 2002 respectively. According to the Nichigin Tankan, economic reports issued by the Bank of Japan in June, the sentiment of leading manufacturers towards the economy also improved since September 2000, and at the same time it marked the highest improvement in the past.

Domestic demand, however, was sluggish as a whole. The economy was not brisk enough due to the combination of corporate restructurings, bankruptcies, a high unemployment rate, poor improvement in revenues, and relatively stable private consumption. Corporate capital investments continued to slump with a negative growth since the January-March 2001 period through the July-September 2002 period. This was due to policies that have placed priority on disposing of excess production capacities and reducing the amount of borrowed money. Besides these, no great progress was made on the disposal of outstanding bad loans by financial institutions, a step that is necessary for the healthy growth of Japan's economy.

In addition to these circumstances, the US economy appeared troubled after summer, which caused concern as Japan's economy relies heavily on the United States. Being affected by the reduction in exports, the nation's industrial production continued to fall from September 2002 compared with the previous month, and a coincidence index fell below the 50 percent level in November, providing evidence of economic deterioration. Stock prices have continued to drop since fall 2002, and hit a record 19-year low due to the fears of the deterioration of the US economy and to delays in the disposal of outstanding bad loans, which in turn have aggravated the financial positions of banks and many other business organizations. As a result, Japan's economy is facing a more severe situation.

Both the Japanese government and the Bank of Japan downgraded their assessments of the economy in their November 2002 report for the first time in almost one year. They adopted various kinds of pre-emptive measures to avoid entering another downturn. In September, the Bank of Japan took an unusual measure and purchased stocks owned by commercial banks in order to stabilize the financial situation. In October, the Government decided to postpone the implementation of a pay-off system for bank deposits that placed priority on paying back outstanding bad loans. It also decided to take comprehensive measures mainly to fight deflation, enhance financial systems, and reform industries and corporations. In addition, in January 2003, a supplemental budget to the extent of six trillion yen was approved by an ordinary session of the Japanese Diet.

The real GDP in fiscal 2002 (ending 31 March 2003) is expected to show a positive growth of 0.9 percent. With regard to real growth in fiscal 2003, some degree of improvement is expected due to a series of measures taken by the government so far and to other scheduled measures such as tax reductions. On the other hand, private consumption is unlikely to improve due to new additional measures such as pension cutbacks and tax increases for some goods. As a result, the real GDP is estimated to stay on a 0.6 percent growth track. Furthermore, a bright forecast cannot be expected due to various uncertainties such as the serious concerns regarding the Iraqi situation, price increases in crude oil, and unstable exchange rates.

Forecast of real GDP and related indicators by government (%)

Fiscal Year		2001 (actual)	2002 (forecast)	2003 (forecast)
Real GDP		-1.4	0.9	0.6
	Private Consumption Non-residential Investment Residential Investment Exports of Goods & Services	1.5 -4.8 -8.2 -7.9	1.5 -4.0 -2.6 7.9	0.4 1.8 -2.0 1.8
Unemployment Rate Domestic Corporate Goods Price Index Wholesale Price Index		5.2 -10.2 -1.1	5.4 3.1 -1.7	5.6 2.0 -0.9

2. PERFORMANCE OF THE PAPER INDUSTRY - 2002

a. Consumption, production and trade

Total consumption of paper and paperboard in the January-June period was sluggish with a fall of 4.4 percent compared to the same period of the previous year, but improved by 1.4 percent for the rest of the year. As a result, the growth for 2002 remained negative for the second straight year; subsequent to a negative growth of 2.8 percent in 2001. Demand for paper and paperboard was anticipated for World Cup Soccer, a prestigious event that took place for the first time in Asia in 2002 producing synergetic effects. However, increased tonnage was less than had been expected.

Total paper and paperboard production was stagnant as well, reflecting low consumption. However, the production in the January-June period fell by 2.9 percent compared to a year earlier, the degree of which was less than that of the total consumption. This was mainly because of a 10 percent reduction in imports and a 24.7 percent increase in exports over the same period of the previous year. The production in the July-December period rose by 2.7 percent compared to the previous year due to the recovered consumption and the continuing large increase in exports. The total production for year 2002 decreased by 0.4 percent over the previous year.

Supply and demand in 2002 (`000 metric tonnes)

		Apparent Consumption		Production		Imports		Exports
			%		%		%		%
Newsprint Printing & Communication 　Coated Paper Packaging Sanitary Other Paper		3 696 10 350 6 252 881 1 688 1 002	-2.1 -1.1 -0.5 -5.9 -1.3 1.2	3 597 11 231 6 387 973 1 688 1 042	3.8 0.5 1.7 -3.3 -1.3 1.2	565 685 344 4 - 32	-7.6 -4.1 -4.6 -53.1 11.8	287 745 479 96 - 72	62.5 38.3 34.7 21.3 4.7
Total Paper		18 612	-1.4	18 531	0.8	1 286	-5.6	1 200	39.0
Containerboard Folding Carton Other Paperboard		9 145 2 018 833	-0.8 0.9 -8.6	9 284 1 992 867	-1.4 1.5 -8.8	82 149 1	8.5 3.0 33.5	212 122 35	-20.8 13.2 -13.1
Total Paperboard		11 996	-1.1	12 143	-1.5	231	5.0	378	-11.5
Grand Total		30 613	-1.3	30 674	-0.1	1 517	-4.1	1 578	22.3
	January - June	15 024	-4.4	15 083	-2.9	726	-10.0	785	24.7
	July - December	15 589	1.9	15 590	2.7	791	2.0	792	20.1

Source: The Ministry of Economy, Trade and Industry, and the Ministry of Finance.

Paper production rose by 0.6 percent in the January-November period, while paperboard production fell by 1.9 percent for the same period. The major reasons for this contrast were that paper imports declined and exports increased substantially, whereas paperboard imports slightly increased and exports weakened. In addition, corporate bankruptcies, business discontinuation, and capacity reduction with respect to paper, exceeded that of paperboard. Furthermore, shortage of old corrugated cartons (OCC) and their price hike after summer caused constraint in paperboard production.

In the paper industry, several manufacturers recently withdrew from the market due to bankruptcies and business discontinuations. In addition, many uncompetitive paper and paperboard machines are being idled. In this situation, paper and paperboard production capacities reduced in 2002 over the previous year because no actual new capacity was on stream. The production level of paper and paperboard in 2002 seems to have been the same as in 2001. The operating rate, however, was estimated at 91.4 percent for paper and 88.4 percent for paperboard in 2002, showing a slight increase in paper and remaining about the same in paperboard in 2001.

Paper and paperboard capacity (`000 metric tonnes)

	2001			2002			2003
		%	operating rate		%	operating rate		%
Paper	20 377	-0.4	90.2	20 300	-0.4	91.4	20 054	-1.2
Paperboard	13 902	0.4	88.7	13 735	-1.2	88.4	13 307	3.1
Total	34 279	-0.1	89.6	34 035	-0.7	90.2	33 361	-2.0

Note: % indicates increase or decrease from the previous year

Total paper and paperboard imports fell by 6.4 percent in the January-November 2002 period from a year earlier. The main reason for the reduction in imports was weak domestic demand.

Total paper and paperboard exports increased by 25 percent in the January-November 2002 period and paper exports increased by 42 percent. This increase was supported by the favourable economic expansion in Asian countries including China. On the contrary, total paperboard exports decreased by 9 percent for the same period. This decrease seems to have been caused by production curtailment due to the shortage of OCC. This is due to an increase in OCC exports to China and the expansion of production capacity in China.

Looking at the raw materials sector, it was noticeable that recovered paper consumption continued to increase and exports thereof expanded further. Recovered paper consumption in the January-October 2002 period increased by 1.5 percent over the previous period, despite paper and paperboard production decreasing by 0.6 percent for the same period. As a result, the utilization rate of recovered paper rose to 59.5 percent in 2002 from 58.0 percent in 2001. Recovered paper exports marked a record high level in 2001. Furthermore, exports of recovered paper have renewed the previous record and attained a 42 percent increase in the January-November 2002 period over a year earlier. As a result, there was a tightening in the supply-demand situation of the recovered paper market.

b. Financial performance

Sales of the 12 listed companies on the Tokyo Stock Exchange fell by 1.8 percent for the April-September 2002 period compared to a year earlier as they were affected by reductions in quantities and prices. Sales in the October 2002-March 2003 period are expected to improve because of the penetration of price hikes. However, full year sales in fiscal 2002 (April 2002-March 2003) are estimated to edge down by 0.2 percent over the previous year. On the contrary, corporate profits improved significantly in the April-September 2002 period and are expected to improve even further from October onwards. The largest factor for the improvement in profits is viewed as the rationalization effects stemming from corporate restructuring. The rate of recurrent profit against sales is expected to mark 3.6 percent for fiscal 2002 (April 2002-March 2003), the level of which, however, still remains low.

Consolidated results of listed 12 paper companies (million yen)

	Apr - Sep 2002 (actual)		Apr 2002 - Mar 2003 (forecast)
		% Change		% Change
Sales	1 892 973	-1.8	3 827 850	-0.2
Recurring profit	53 844	19.0	138 460	54.3
Net profit	11 891	39.8	44 950	nm

c. Outlook for the future

Domestic demand for paper and paperboard in fiscal 2003 is estimated to fall by 0.1 percent over the previous year, which marks the third consecutive year of negative growth for the first time in Japan's history. This is mainly because a large improvement is not expected in the economy due to continuing corporate restructuring and the accelerating disposals of bad loans.

Therefore, paper and paperboard manufacturers will continue to confront difficulties in management. However, the balance of the supply-demand situation is expected to make a relatively firm improvement thanks to the development of consolidation through mergers and acquisitions (M&A) and estimated reduction in paper and paperboard production capacity in 2003.

Exports are expected to decline in 2003, whereas they had greatly increased in 2002. The reasons for negative exports are expected to be the reduction in export tonnage due to the shortage of recovered paper, which limits the manufacture of some paper and paperboard grades, and anti-dumping tariffs imposed by China in November 2002 on imported coated free-sheets from Korea, the United States and Japan. China is now greatly influencing the world supply-demand of paper and paperboard.

Domestic demand forecast by main grade - 2003 (%)

Newsprint	Printing & Communication	Packaging	Sanitary	Total Paper	Container Board	Folding Carton	Total Paperboard	Grand Total
-0.3	0.3	-1.9	1.1	0.1	0.2	-1.5	-0.3	-0.1

Source: The Japan Paper Association

3. ISSUES OF PARTICULAR INTEREST

a. Progress in sustainable forest management and certification

Japanese companies have been slow to become certified under international forest certification systems such as ISO 14001 and Forest Stewardship Council (FSC). The first Japanese lumber company was certified in 1997 under ISO 14001 and the first forest owner to be certified under FSC was in 2000. Three lumber companies obtained ISO certification covering 100 000 ha, and four forest owners obtained FSC certification covering 7 000 ha by the end of 2000, all of which accounted for only 0.4 percent of Japan's total forest lands.

Major reasons for the low level of popularity for international forest certification systems are as follows:

Own forestry program and forest reserve system

Japan has its own forestry program and forest reserve system that reflects Japan's particular conditions, which have worked well to manage sustainable forests. As most of Japan's forests are positioned on steep mountains, they should be managed efficiently to secure soil and water conservation as well as a sufficient supply of forest products. In addition, harvesting and plantation plans of private forests have been subject to the authorization and supervision of national and local governments under Japan's original sustainable forest management systems.

Domestic market consumption

Most of the forest products manufactured in Japan have not been export-oriented but rather consumed in the domestic market. As a result, the forest industry has not been required to get forest certifications overseas.

However, recently some local governments have shown an interest in forest certification, and users have also started to require certified products. Many kinds of certifications are prevailing internationally and many kinds of certified forest products are being imported into Japan. Thus, there arises an increasing concern about possible confusion even in the domestic market unless appropriate measures are taken.

Under these circumstances, the Japan Forestry Association, consisting of forest companies and forestry associations, announced last January the establishment of the Sustainable Green Ecosystem Council (SGEC - tentative name). Its aim will be to bring into existence a suitable forest certification system in Japan.

The SGEC is now in preparation and expected to be established soon. It will be formed based on the spirit and standards set by the Montreal Process and ISO 14000, while taking into consideration utilization of and harmonization with the existing domestic forest management systems. It is intended to establish certification systems applicable across the board at various stages of forest product production - through manufacturing, converting and distributing channels.

Basic Purposes of the establishment of the SGEC:

• To ensure that certified forests in Japan are managed in responsible and sustainable ways with economic, ecological, environmental and social aspects taken into consideration;

• To establish a system which guarantees high credibility, both at home and abroad;

• To ensure domestic lumber resources are sustainable and renewable.

Mutual recognition

It is intended that the SGEC cooperate with overseas certification systems for mutual recognition. It is particularly important for the SGEC to collaborate with overseas certification organizations because most of lumber and forest products on the Japanese market are being imported. Furthermore the SGEC plans to work proactively together with international organizations such as the International Forest Industry Roundtable (IFIR) and the Pan European Forest Certification (PEFC) to work out the framework of mutual recognition.