After another year of modest expansion, Japan’s export-driven growth may be on shaky ground as uncertainty looms over its trading partners, bolstering the case for measures to improve sluggish demand at home.
U.S. President Donald Trump’s protectionist stance on trade and his allegations of currency manipulation are expected to remain sources of concern for policymakers, although friction was absent when Trump and Prime Minister Shinzo Abe met this last weekend.
The Japanese economy grew for a fourth quarter in 2016, posting an annualized real 1.0 percent expansion aided by strong exports mainly to the United States and China — the country’s two biggest trading partners.
But private consumption, one of the economy’s persistent soft spots, failed to pick up strength and marked the first fall in a year. Such weakness in domestic demand would make the economy vulnerable to external shock, economists say.
“If a potential change in U.S. trade policy heightens uncertainty about the global economic outlook, it could drag down the Japanese economy powered by external demand,” said Shunsuke Kobayashi, an economist at the Daiwa Institute of Research.
This view is shared by other economists, who warned of the fragility of an economy relying heavily on overseas economies for growth.
Japan saw increased shipments of cars and electronic parts, mainly for smartphones, helping it report two straight quarters of export growth.
The yen’s depreciation against the dollar in late 2016 also gave a boost to exporters, although analysts believe a further sharp slide in the currency is unlikely as concerns over Trump’s criticisms linger.
“One scenario would be that an increase in exports will spur business spending (to boost output), but that won’t be realistic at a time of increased uncertainty,” said Toru Suehiro, senior market economist at Mizuho Securities Co.
“Even without Trump’s protectionist rhetoric, the U.S. auto market has already shown signs of being saturated, which could slow the pace of growth in exports (from Japan) going forward,” Suehiro added.
Financial markets have hailed Trump’s promise to boost infrastructure spending and cut taxes as a positive for the U.S. economy. But his plan for a border tax has been viewed with caution.
Many analysts say more time is needed to gauge the impact of Trump’s economic and trade polices, as details remain unclear.
But if cars exported from Japan to the U.S. increase in price by 20 percent, this will, combined with other factors, ultimately reduce the nation’s gross domestic product by 0.6 percent, or ¥3.4 trillion ($30 billion), according to an estimate by SMBC Nikko Securities Inc.
For years, Japan has faced the old and new challenge of boosting domestic demand, even as past attempts have failed to energize private consumption that accounts for roughly 60 percent of GDP.
Consumer sentiment took a hit with the consumption tax hike in 2014, which prompted Abe to postpone a second increase until October 2019.
A senior official expressed worry that private consumption will not gain strength quickly enough, even as a temporary hit from increased vegetable prices fades.
Daiwa’s Kobayashi said one reason for the recent sluggishness in consumption is that disposable incomes are being squeezed.
“If we can see wage growth and share prices rise, this may encourage consumers to spend,” he said. “For now, though, that hasn’t been the case.”
As the annual spring wage negotiations go into full swing, economists are keeping tabs on whether companies can go ahead with pay hikes for the fourth straight year as requested by Abe, who sees it a necessity to support consumer spending.
The Abe administration is also trying to ensure a system of equal pay for equal work as part of broader work reforms.
Reform “is in the right direction,” said Junichi Makino, chief economist at SMBC Nikko Securities, acknowledging that Japan needs to review its wage system over the longer term to address labor shortages and boost productivity.
“We also need innovations … because what we truly need is something brand new,” Makino added.