Despite the longest growth run in nearly three decades, Japan’s economic outlook remains far from robust as uncertainty abounds over wage growth and business investment.

Under Abenomics, Prime Minister Shinzo Abe’s program of radical monetary easing, fiscal spending and vows of structural reforms, the economy grew at an annualized rate of 0.5 percent in the October-December period, marking the eighth straight quarter of expansion. It slowed from a revised 2.2 percent increase in the previous quarter and was below the potential growth rate of around 1.0 percent.

Many economists expect the economy to keep growing at a moderate pace this year, but the biggest wild card could be volatility in financial markets after the recent global stock market rout.

The key question now is whether domestic demand — private consumption and corporate spending — can pick up further and help the world’s third-largest economy sustain its recent growth momentum, economists said.

“Private consumption has been recovering on the back of modest wage growth, but is not solid enough to absorb shocks when something bad happens,” said Yuichiro Nagai, an economist at Barclays Securities Japan Ltd.

Economists are focusing on how companies might handle pay hikes in annual negotiations between management and labor unions toward mid-March amid record earnings and the tightest labor market conditions in decades.

More robust wage growth is seen as critical for consumers to increase spending and for the government to consider when it will be safe to declare an end to decades of deflation.

“If you look at growth in pretax profits, the consumer price index and tightness in the labor market, companies may settle for a pay hike of around 2.3 percent,” Nagai said.

That is still lower than the 3 percent hike Abe is asking companies to achieve during this year’s shuntō wage negotiations. Other economists also say 3 percent is a tall order and wage growth will likely be below 2.5 percent.

“Even if it is below 2.5 percent, we believe the Abe administration will likely declare a break with deflation by the end of fiscal 2018 (through March 2019),” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities Inc.

“It will also likely decide to go ahead with another consumption tax hike (as planned). The Bank of Japan, however, won’t be able to start normalizing its (crisis-mode) policy in that time frame,” Maruyama added.

Bolstering domestic demand has been a challenge for the export-reliant economy ahead of the planned sales tax increase from 8 percent to 10 percent slated for October 2019. Consumption took a hit after the previous hike in 2014.

The latest GDP data released Wednesday pointed to strength in capital spending. Businesses continued to increase investment for the fifth quarter in a row, up 0.7 percent.

With borrowing costs low thanks to the BOJ’s bold monetary easing, companies have been stepping up investment to boost capacity amid robust demand for domestic products and to cope with shortages of manpower.

Labor shortages are particularly severe in the services industry amid economic growth and a shrinking population, with the availability of jobs across sectors hitting its highest in over four decades.

Travel agency H.I.S Co., for instance, is turning to robotics to boost efficiency and save labor. At a hotel that recently opened in Tokyo’s glitzy Ginza district, two humanoid robots serve as receptionists at the front desk. The use of advanced technology such as robotics enables the hotel, called Henn Na Hotel (strange hotel), to manage with roughly a fourth of the manpower needed to operate a hotel of a similar size, a company official said.

Strong demand for such labor-saving technology is one reason why economists predict capital spending will remain solid. The 2020 Tokyo Olympics and Paralympics will also give a near-term boost.

“If you are talking about a time span of a decade or two, the domestic market will get smaller,” Barclays’ Nagai said. “For the next few years, companies will be encouraged to increase spending to prepare for the Olympics and on research and development related to artificial intelligence and self-driving technology.”

That still hinges on whether the recent volatility in financial markets is only temporary or something lasting much longer.

While the yen’s depreciation against the dollar and the euro has given companies a helpful boost to their earnings, wild swings will likely hurt sentiment and give corporate managers a reason to put off spending.

“We will have to monitor how things will go in financial markets,” a senior government official said.

“What we have right now is not a high-growth economy but one that has been gradually recovering with the help of recovering domestic demand.”

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