This is definitely the year in which Japan will end its deflationary spiral.
That is the general sentiment among Japanese business leaders, including Japan Business Federation Chairman Sadayuki Sakakibara.
“We’ve got to establish a way to revitalize the Japanese economy this year,” Sakakibara said at a news conference in Tokyo earlier this month. “We likely saw positive economic growth in the October to December period and will also have positive growth in the January to March period. Company earnings are good, unemployment is low, oil prices are down and consumption will expand.”
The Japanese economy will be a feature at Thursday’s “The Japan Outlook,” one of the conferences at the annual meeting of the World Economic Forum, dubbed Davos after the Swiss resort where it is held. Session participants will discuss the next phase of “Abenomics,” or Prime Minister Shinzo Abe’s economic measures, among other issues.
One hot topic is likely to be the postponement of a planned consumption tax hike from October 2015 to April 2017.
Abe in November announced the delay after it was learned the economy shrank 1.6 percent on an annualized basis during the July to September period from the previous quarter. That figure was in contrast with an average market forecast of a 2 percent expansion. The shrinkage was revised down to 1.9 from 1.6 in December.
However, Sakakibara and other Japanese business leaders have said the bad times are over. Such poor results have been offset by good news such as the postponement of the tax hike and the consequent expectation of increased individual consumption.
Continued growth is thought to be likely during the next fiscal year, with Sakakibara estimating annual economic growth to be around 1.7 percent.
That is in line with the predictions of other business leaders. According to a survey by the Nihon Keizai Shimbun business daily, published Jan. 3, the average of estimates by 20 Japanese company leaders is 1.7 percent, with a range of 1.25 percent to 2.4 percent.
The International Monetary Fund in October estimated Japan’s gross domestic product growth for this calendar year at 0.8 percent. The Organisation for Economic Co-operation and Development in November also predicted Japan’s economic growth will be 0.8 percent for 2015. The Bank of Japan’s estimate in November was 1.5 percent growth in fiscal 2015.
Mizuho Financial Group CEO Yasuhiro Sato, who gave the 2.4 percent estimate, said in the survey that strong company earnings will lead to wage increases and a clear recovery of individual consumption. He also said companies will expand capital spending on expectations of future demand increases.
Wages are expected to increase because the yen’s recent depreciation improves earnings of export-heavy companies and those with branches outside Japan. The dollar is hovering around ¥120 this month, compared with about ¥105 at the same time last year.
“Companies with strong earnings will probably raise wages. That will brighten consumer morale and individual consumption will increase,” the Japan Association of Corporate Executives Chairman Yasuchika Hasegawa said.
While few company leaders clearly said they would increase wages, they indicated they are likely to do so.
“We don’t know for sure if we’ll increase wages this spring. We’ll watch our earnings going forward. There’s been no concrete decision, but we’re positively considering increasing wages,” Nomura Holdings Inc. Group CEO Koji Nagai said in a sideline interview with media during a New Year’s party of business leaders at the Hotel New Otani, Tokyo, earlier this month.
Trading company Itochu Corp. President Masahiro Okafuji said he wants to create a virtuous cycle of increasing earnings, wages and motivation.
“It’s important to reward employees if companies post profits,” he told journalists at the hotel.
Some company leaders pointed out that while inbound tourism is strong, thanks to a combination of the weak yen and the government’s “Cool Japan” push, a campaign to promote Japanese culture, the government and businesses should continue to work on attracting tourists. The number of foreign tourists to Japan reached a record high last year, exceeding 13 million, with the government setting a target of 20 million by 2020.
“Tourism will definitely continue to be brisk. We should improve services, such as increasing the number of duty-free shops and making multilingual services available. These are good for not just companies, but also for the country,” Lawson Inc. CEO Genichi Tamatsuka said at the hotel.
Seibu Holdings Inc. President Takashi Goto also said inbound tourism will grow this year due to the government’s policy promoting it. Seibu Holdings operates the Prince Hotel chain.
Capital spending is also expected to rise this year.
“The economy is better in every respect. The demand-supply gap will be eliminated this year. Workers are in demand and wages will go up. To meet growing demand, companies will increase capital spending, which will create demand. It’s a virtuous cycle,” Tokyo Chamber of Commerce and Industry Chairman Akio Mimura said.
“I was wondering why exports have not increased much yet, despite the weak yen. I think this indicates there are plenty of opportunities for companies to spend money on raising production capacity,” he said.
Business leaders also praised the plan to lower corporate taxes, noting that money saved from the cut can be spent on investment, Tamatsuka said.
Another factor contributing to this year’s bright outlook is Abe’s commitment to work on economic reform.
At the New Year’s gathering, Abe told the business leaders, “This Diet session will surely be the one to realize reforms.”
Of the economic reforms, deregulation of medicine, agriculture and the caretaking and nursing industry — which have been heavily regulated to protect existing companies from newcomers — would stimulate the economy and ensure long-term growth for Japan, the business leaders said. They also agreed that the government should implement the reforms in designated economic areas so as to realize concrete examples as soon as possible.
“I have very high expectations for the government. I want the government to make Japan an attractive market for investors. Deregulation and establishing designated economic areas will help us find the way to long-term prosperity,” Hasegawa said.
He also said reaching an agreement on the Trans-Pacific Partnership, or TPP, is very important for the Japanese economy.
“I would like Japan to take the lead and hopefully reach an agreement this spring,” he said. The U.S., one of the negotiating countries, may steer focus away from the TPP this fall because politicians will be gearing up for the 2016 presidential election, he added.
The TPP is a proposed regional regulatory and investment treaty under negotiation by 12 countries in the Pacific region. While the U.S., Japan and Australia are among those in the negotiations, China is not.
Business leaders’ faith in Abe is backed by the victory of his Liberal Democratic Party in the general election in December. Following his decision to postpone consumption tax hike, he called the election to ask voters to judge his decision.
Abe should be happy with the result. The ruling coalition — the LDP and Komeito — won a combined 325 out of 475 Lower House seats, losing only one from pre-election numbers and maintaining a two-thirds majority.
“Abe has gained the approval of voters. Therefore, I want him to really implement reforms even though the reforms may harm some people,” Mimura said.
Sakakibara also said the government should speed up deregulation and energy-policy decision making.
In the end, every aspect of the internal economic environment points to bright prospects. The risk, the business leaders said, would be a slowdown of the European, Russian or Chinese economies. Additionally, further depreciation of the yen may have a negative impact on the Japanese economy as imported goods could become too expensive. Mimura pointed out some small companies are already suffering from increased import costs.
Nonetheless, overall prospects are very strong. Companies can invest more as interest rates are low and consumer spending will increase on wage increases.
“It’s possible we can see 2 percent economic growth in one of this year’s later quarters,” Mimura said.
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