The Japanese economy posted growth in the last quarter, but I would like to make a few observations about the components of the growth.
The revised figures for gross domestic product in October-December 2009, announced on March 11, showed that economic activity grew 0.9 percent on the previous quarter for an annualized rate of 3.8 percent. While faster than anticipated progress in inventory adjustment was one of the factors that contributed to the downward revision of the preliminary quarterly GDP figure of 1.1 percent (4.6 percent annualized), capital investment managed to rise 0.9 percent for the first growth in seven quarters.
Based on the revised data, the government last Monday reported the first improvement in the Japanese economy since July 2009, describing its as “picking up steadily,” even though its sustainability is weak and unemployment remains high.
But closer examination of the data behind the rosy results raises some questions.
First, it should be noted that the 0.9 percent growth can be broken down to 0.4 point for internal demand and 0.5 point for external demand. Personal consumption — the largest component of GDP — expanded a robust 0.7 percent, an uptick that could be attributable to the Eco-point and subsidy programs launched by the government to promote replacement demand for energy-efficient appliances and fuel-efficient cars.
However, we need to be aware that these programs are eating into future demand. Consumers are believed to be pushing up purchases of new cars and TVs to beat the deadline for the popular programs whether their older products are still usable or not.
Naturally, these programs cannot be continued indefinitely. Similar campaigns in other advanced economies show that spending can drop off rapidly once the incentive programs end.
In the past, Japan was in the habit of declaring an “economic recovery” whenever GDP grew for three consecutive quarters. This time the optimism was muted — perhaps because officials are well-aware of the risk of a fallback in consumer demand.
A second point is that governments are pushing for these incentive programs not just as environmental campaigns, but also as a way to shore up consumer spending battered by recession.
The global financial crisis jacked up unemployment in many advanced economies as competition against emerging economies climbed and much of the world entered recession.
The slump is deep and eating into consumers’ disposable income, including overtime pay and bonuses. As the effects of globalization sink in, wages are decoupling from earnings in many advanced economies.
Third, the amount of energy supposedly saved by “eco-friendly” products needs to be weighed against the energy expended to make them and to dispose of the old ones being replaced.
A household may be able to halve its electricity bill by buying a new, energy-efficient air conditioner, but if the savings are canceled out by the cost of the energy needed to make the new appliance and get rid of the old one, can you say the process is really environment-friendly?
The mass production and mass consumption Japan embraced after the war contributed to its “miracle” economic growth, but it also caused rampant pollution and the loss of the traditional Japanese belief of the value of making good use of things.
Of course we need to save energy. But we should also take a look at the additional burden being placed on the global environment by the introduction of energy-saving products.
These are not Japan’s problems alone. Countries around the world need to cooperate to assess the overall burden on the environment and deal with the problem. When the economy goes bad, each country tends to put priority on its own interests. History shows such tendencies lead to worldwide economic decline.
Progress eluded the COP15 climate change conference in Copenhagen in December as national interests trumped international cooperation on a global issue. The author hopes that both the advanced and developing economies can overcome these issues and seek a more cooperative path toward progress at the COP16 conference in Mexico in November.
Teruhiko Mano is chairman of the Mano Economic Intelligence Forum.