At the latest Group of Seven meeting in Ottawa, Finance Minister Masajuro Shiokawa sounded rather optimistic about economic prospects.

Shiokawa told his G7 counterparts that he expects the Japanese economy to grow by 1 percent in fiscal 2003. His estimate, however, has met with a lot of skepticism at home.

The government itself is forecasting zero growth in fiscal 2002 and an "intensive adjustment phase" the next two years. The economy can hardly be expected to pick up while banks remain overburdened with bad loans.

Still, if the nation fails to even get nominal economic growth into positive territory, the government deficit will be most likely to become unsustainable in the near future.

Even if the administration of Prime Minister Junichiro Koizumi remains committed to the 30 trillion yen-a-year cap on new government bond issues, the government debt will climb by about 6 percent of nominal gross domestic product each year.

If such negative growth continues, the debt-to-GDP ratio, now around 130, will rise further — even in real terms after allowing for inflation. This is why the government is placing priority on measures to fight deflation.

Although Shiokawa is aware that his growth estimate will prove wishful thinking, he may have been trying to appease his worried G7 counterparts. In other words, he is fully aware the economy is already in dire straits.