Japan’s latest GDP figures appear to support the government’s view in last month’s economic report that “signs of recovery are discernible in some sectors.” In the April-June quarter, total output of goods and services increased 0.5 percent from the previous quarter, or 1.9 percent annually. It is the first time in 15 months that a positive rate of growth has been recorded quarter to quarter.
But that is hardly encouraging. Compared with a year earlier, GDP slipped 0.9 percent, attesting to continued weakness in the economy. Exports accounted for more than half of second-quarter growth; internal demand remained anemic. Consumer spending rose only slightly. Business investment, housing starts and public works projects continued to drop.
The worsening of the economic picture is due partly to the adoption of more accurate methods for calculating GDP. The new rules cover not only statistics on the demand side, such as household spending, but also numbers on the supply side, such as industrial shipments and commercial sales. The idea is to keep closer tabs on overall consumption.
As a result, the quarterly rate of GDP growth for the January-March period has been revised downward — from 1.4 percent (5.7 percent annually) to slightly below zero. Similarly, the rate for fiscal 2001 has been lowered from minus 1.3 percent to minus 1.9 percent, the largest year-on-year drop since fiscal 1981 when current methods of comparison were introduced.
Second-quarter growth is a sobering reminder of the economy’s precarious dependence on foreign sales. Net exports contributed to 0.3 point of the 0.5 percent growth, meaning that trade surpluses made up 60 percent of the GDP increase. An export-led recovery is potentially risky because it is at the mercy of demand fluctuations in export markets.
That risk appears to be growing amid the increasingly opaque prospects for the U.S. economy. A weaker dollar, or a higher yen, drags down Japanese exports because it makes Japanese products — autos, electronics and so on — more expensive abroad. The Nikkei stock index on Tuesday plunged to 9,217 points, the lowest level in 19 years, reflecting investor uncertainty over the future of the Japanese and U.S. economies.
It is also worrying that Japanese companies are moving production overseas at an accelerated pace — worrying because these moves erode the domestic manufacturing base and, in the long run, may well lead to the gradual decline of exports as well. But there is also an advantage to overseas production: Domestic consumption is stimulated as quality, lower-priced products are exported back to Japan.
Consumer spending, which accounts for more than half of GDP, remains another soft spot in the economy. Although consumers as a whole spent 0.3 percent more in the second quarter than they did in the January-March period, spending by worker families is depressed. Retail sales are below those of the same period the previous year. Sales at convenience stores dropped in July for the first time.
Unemployment, which remained at 5.4 percent in July, shows no signs of abating. The number of jobless people has continued to rise for 16 straight months as companies, large and small, step up restructuring. As things stand, it is too optimistic to expect a further expansion in consumer spending.
Business spending on capital goods, another key engine of growth, dropped 0.5 percent for the sixth consecutive quarter-to-quarter decline. The good news is that the rate of decline has slowed. The bad news is that many industries and companies are still beset by overcapacity. With the economy stuck in deflation, there is little or no investment enthusiasm in most sectors. It will be a long time, say analysts, before capital spending picks up.
The government forecasts that the growth rate for fiscal 2002 will be about zero — a target it says can be achieved if the economy does no worse than remain flat for the rest of the current fiscal year (through March 2003). That scenario, however, will go awry if the sectors of growth at present, such as exports, lose steam in the months ahead.
Consumer spending holds the key to recovery. Prospects are not promising, however. Beginning next April, health insurance premiums will go up, causing a further drag on stagnant wages. Moreover, increases in unemployment insurance and nursing-care insurance premiums are being considered.
In summary, there is little or nothing to cheer about in the first GDP rise in five quarters. In fact, it might have been just a blip on the economic screen. The challenge for the government remains essentially unchanged: achieving sustainable growth through structural reform. On that basis, however, it will need to give more attention to recovery measures.
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