We believe that Japan’s economy peaked out in late 2007 and entered a downturn. Real GDP contracted for the second consecutive quarter in July-September 2008, and repercussions from the financial crisis will likely extend the negative growth into the second half of fiscal 2008. As a result, we estimate real GDP will contract -0.9 % in fiscal 2008 for the first annual contraction since shrinking -0.8% in fiscal 2001. The economy will bottom out in the second half of fiscal 2009 as overseas economies recover. However, growth will remain slow due mainly to the sluggish U.S. economy, where household balance sheets need to be cleaned up. Japan’s economy will continue to perform below the potential growth rate, posting negative growth of -0.8% in fiscal 2009 and recovering to a modest 0.8% pace in fiscal 2010.