Data highlights fragility of recovery

Japan’s gross domestic product increased 0.3 percent, or an annualized 1.0 percent, in the October-December 2013 period from the previous quarter. Although this represents an expansion of GDP for four consecutive quarters, the 1.0 percent growth was less than the 1.1 percent growth posted in the previous quarter and much lower than the average 2.6 percent growth predicted by private-sector economists.

Consumer spending registered a 0.5 percent increase in the October-December period, higher than the 0.2 percent increase posted in the previous quarter.

Capital investment went up 1.3 percent and housing investment 4.2 percent, but the government should not take an optimistic view about Japan’s economic recovery.

Increased consumer spending should be regarded as having resulted from the rush to make purchases prior to the scheduled consumption tax rise from the current 5 percent to 8 percent, beginning in April. It’s possible that the consumption tax rise will encourage people to tighten their purse strings, thus leading to a shrinkage of consumer spending, which accounts for about 60 percent of Japan’s GDP.

The government also should pay attention to the fact that although public works spending increased 2.3 percent, the whole economy did not expand as much as market players had expected.

Helped by the brisk export of automobiles to the United States and the cheap yen, overall exports registered growth for the first time in two quarters. But the growth was only 0.4 percent.

Imports increased 3.5 percent, mainly due to the increased import of fuels for thermal power plants. Thus external demand — exports minus imports — pushed down the whole economy 0.5 percent while internal demand pushed it up 0.8 percent.

The environment for exports is not good. U.S. tapering of quantitative monetary easing is likely to lead to a redirection of funds from emerging economies to the U.S., thus causing uncertainty in those economies, which are important markets for Japanese exports.

Another factor that must be taken into account is shadow banking in China, which is expanding. If shadow banks default on their promises concerning their financial products, it will put a brake on the Chinese economy. A downturn in the Chinese economy will affect other emerging economies in Asia since China is an important destination for their exports. Such a situation would then have an adverse effect on Japan’s exports.

Economic data compiled by the Cabinet Office are mixed. While one index shows current economic conditions improving for four straight months through December, a separate monthly survey conducted by the Cabinet Office on what people think economic conditions will be like in 60 to 90 days worsened for two consecutive months through January.

Apart from short-term government measures to help buoy the economy, it will be important for both labor and management to realize sizable pay raises in the current season of wage negotiations and for the government to take long-term measures to change Japan’s economic structure so that Japan can achieve sustainable growth underpinned by strong domestic demand.