The stock market turbulence in the year’s first week of trading seemed to cast a pall over the prospects of the economy, the recovery of which remains shaky after three years under Prime Minister Shinzo Abe’s trademark policies. The government forecasts that GDP growth in the fiscal year beginning in April will reach 1.7 percent in real terms — up sharply from around 1 percent estimated for fiscal 2015 and more optimistic than what many private-sector economists predict. The Abe administration should be on guard against the various downside risks to the economy and be ready to take appropriate steps.
The economic landscape remains a mixed picture. Japan narrowly escaped a second recession under the current Abe administration when the revised July-September GDP data marked annualized 1.0 percent growth from the previous quarter. But the pickup in consumer spending and capital investments by businesses remains sluggish, and exports are dampened by decelerating growth in emerging economic led by China.
Major companies continue to enjoy improved profits, and top executives of many of these firms — under constant urging by members of the administration — say they are ready again to offer wage hikes. It remains unclear whether pay raises will be broad enough across the economy to shore up personal consumption, which has remained weak since the first consumption tax hike in 17 years in April 2014. Wage gains have been outstripped by rising prices for much of the past three years, and while the global plunge in crude oil prices has slowed inflation to anemic levels in recent months, higher prices of food and other daily necessities have dampened consumers’ appetites.
While some major firms post record profits buttressed by the weak yen, they remain cautious toward the Abe administration’s calls to put more of their earnings to capital investments, out of concern over the prospect of domestic markets amid Japan’s shrinking population. Many of them spend their accumulated profits on overseas investments. The value of Japanese firms’ acquisition of overseas businesses in 2015 reportedly rose 94 percent from the previous year to hit a record ¥11.26 trillion.
The slowdown in China’s economic growth is another factor that dampens Japanese firms’ investment appetites. The Nikkei average on the Tokyo Stock Exchange, which finished its 2015 trading at a 19-year high for the year-end close, began the new year with a five-day losing streak for the first time in its postwar history as concerns over the Chinese economy and other factors led to a global chain reaction of market slides.
It seems ironic that the sole bright spot in Japan’s economy is inbound tourism, boosted by sharp increases in Chinese visitors on shopping sprees. The number of visitors to Japan in the first 11 months of 2015 rose 47 percent over the same period of the previous year, and the annual total is estimated to have topped a record 19 million. The figure is certain to exceed 20 million for the first time this year and is expected to generate up to ¥5 trillion in fresh demand and have major ripple effects across the country.
Meanwhile, the consumption tax is scheduled to be raised again in April 2017, from 8 to 10 percent. It’s expected that the rush to buy before the tax hike will boost consumer spending into the latter half of fiscal 2016 and shore up growth to a certain extent. But it’s widely believed that the impact will not be as strong as before the April 2014 hike, when the GDP grew an annualized 5 percent in the January-March period — before declining by 7.2 percent in the subsequent quarter.
Depending on the state of the economy in coming months, Abe might come to a juncture where he will have to make a decision on whether to go ahead with the consumption tax hike, which he postponed once in 2014 by 18 months. He has ruled out another postponement — “except when it is deemed to cause a serious damage to the economy to the tune of the Lehman shock” of 2008, which triggered a global recession.
Still, speculation exists that Abe might choose to delay the hike again if economic data point to the risk that carrying it out would trigger another sharp downturn, or that the prime minister will decide to shelve the tax hike and dissolve the Lower House for a snap election to be held with the triennial Upper House poll in July, since having an election after the tax has been hiked in 2017 might damage his Liberal Democratic Party’s performance. That will be one of the government’s key decisions to watch for the coming year.