Editorials

What lies behind the GDP growth

The annualized 2.1 percent growth of Japan’s economy in the January-March period belies the weakness of domestic demand that led to the steepest fall in imports in 10 years — with the sharper than anticipated drop in net imports shoring up gross domestic product for the quarter. The GDP growth for the two consecutive quarters does not warrant any optimism over the course of the economy, as other indicators point to increasing signs that it may be losing steam as uncertainties prevail concerning overseas demand with intensifying trade war between the United States and China.

The government maintains that economic conditions remain steady, citing the robust job market data and corporate earnings. But regardless of whether it changes its official assessment, the state of the economy calls for more policy steps to drive up domestic demand as the main engine of growth.

The economy expanded an inflation-adjusted 0.5 percent from the previous quarter, which translates into 2.1 percent growth in annualized terms, despite the dip in most of its key components. Consumer spending, which accounts for 60 percent of GDP, edged down 0.1 percent for the first fall in two quarters, while capital investments by businesses, another key pillar of domestic demand, declined by 0.3 percent, reflecting poor appetite for investment as output falls due to tumbling exports to China. Public investments rose 1.5 percent for the first gain in five quarters, with the implementation of extra budget spending on anti-disaster measures in response to a spate of natural disasters last year.

Exports plunged by 2.4 percent due to sluggish shipments of semiconductor production equipment and electronic devices to China, whose economy is showing more signs of slowdown due to bitter exchange of retaliatory tariffs with the U.S. In trade statistics, exports have declined year-on-year for four months in a row to March. Japanese manufacturers that have relied heavily on exports to China are being forced to cut back on domestic output, mainly of electronic devices.

What highlighted the sluggish domestic demand was the 4.6 percent decline of imports — whose fall statistically pushes up GDP. The dip in crude oil and natural gas imports — key ingredients of domestic industrial output — has led to the steepest fall in imports since just after the collapse of Lehman Brothers in 2008. Consequently, a 0.4 percentage point gain in external demand — exports minus imports — accounted for much of the 0.5 percent GDP rise, which defied the forecast of a GDP fall for the quarter by most private-sector economists.

The GDP growth in the January-March quarter does not appear to be proof of robust domestic demand. Government officials remain bullish that the strong fundamentals of the economy remain unchanged. True, the labor market continues to be the tightest in decades, with the average ratio of job openings to job seekers in fiscal 2018 to last March rising for the ninth year in a row to 1.62, the second-highest since comparable data became available. On the other hand, the combined net profits of companies listed in the first section of the Tokyo Stock Exchange for the 12 months to March fell 7.3 percent for the first decline in three years — and the steepest fall since Prime Minister Shinzo Abe returned to the government’s helm in December 2012. A key composite index of economic indicators in March, released last week, showed that the state of the economy is “worsening” for the first time in more than six years.

The government says the current extended boom cycle of the economy — which coincides with Abe’s time in office — has likely become the longest in the nation’s postwar history. Following the recent series of alert signs over the economy, it’s being closely watched whether the government will change its assessment — that the economy is on a path of moderate recovery — in a monthly report due out on Friday. Meanwhile, speculation continues that the slowing economy may prompt the government to once again postpone the consumption tax hike to 10 percent, although officials are right to deny that the economy is facing a major economic shock to the tune of the 2008 Lehman shock — without which the Abe administration has vowed to go ahead with the tax hike as planned in October.

The government’s official assessment of the economy aside, the growing uncertainty in overseas demand, with no end yet in sight to the trade war between the world’s largest and second-largest economies, makes it incumbent on Japan to take more steps to spur domestic demand to shore up its economy. After six years of Abenomics, in which the Abe administration and the Bank of Japan have explored mainly fiscal and monetary steps to revive the economy, the options may be narrowing in these policy areas. It’s time that more emphasis was placed on structural reforms and deregulation to explore fresh avenues of the economy’s growth.