On the face of it, Japan’s economy appears headed for a full-fledged recovery. In the first quarter of 2005, the gross domestic product (GDP) grew 1.3 percent from the previous quarter, or 5.3 percent in annualized terms, according to the Cabinet Office. It was the first solid quarterly growth since the 1.4-percent rise a year earlier. As a result, the GDP growth rate for fiscal 2004 reached 1.9 percent for the third consecutive year-on-year gain.
Optimism is hardly warranted, though. A closer look at GDP components, as well as microeconomic conditions, reveals an economy still smarting from the aftereffects of prolonged stagnation. There are not yet reassuring signs of self-sustaining growth led by domestic demand. Key engines for growth — consumer spending, exports, capital investment — all lack long-term power.
Prospects for corporate earnings are becoming cloudy again. Although tallies of earnings reports published so far make it likely that large companies’ pretax profits will chalk up all-time records for the year ended March 31, 2005, exceeding the gains made in each of the previous two years, profit forecasts for the current business year ending in March 2006 are marked by caution, with many firms predicting declines.
Meanwhile, deflation continues. In the first quarter, the GDP deflator — a broad measure of price changes — was down 1.2 percent from a year earlier, showing a further fall from the previous quarter. Thus the prices for goods and services have remained in negative territory for nearly seven years since April-June 1998. In this sense, positive GDP growth is no cause for complacency. Reversing the persistent downtrend of prices remains a major economic policy goal.
The Japanese economy entered a slow recovery path after hitting bottom in early 2002. The recovery appeared to hit a wall in 2004 as GDP declined in the second and third quarters and remained flat in the fourth, giving rise to the view that the economy was “in a pause that may or may not refresh.” In the first quarter of 2005, growth rebounded thanks largely to strong gains in consumer spending and business investment, which more than offset losses in exports.
What are we to make of this? An economic recovery in Japan is usually sparked by a surge in exports as overseas economic conditions improve. Increased foreign sales spur business capital spending and revive corporate earnings. As a result, jobs and wages increase, thus stimulating consumer spending, which makes up 60 percent of GDP. The latest economic recovery had been triggered by the expansion of exports, particularly to the United States and China, beginning about three years ago.
The fact is that, in the first quarter, exports sagged while consumer spending climbed 1.2 percent, the highest in five quarters. Business spending on new equipment and machinery increased by 2 percent, for the first rise in three quarters.
However, much of the growth in household consumption appears to have been merely the result of temporary factors — which had depressed consumer demand in the previous quarter — coming to an end. Natural disasters, including frequent typhoons and a major earthquake, cut into spending on domestic travel, while the unusually warm weather dampened apparel sales. If these and other statistical blips are discounted, consumer spending remains essentially weak.
The lack of strength in consumption reflects the sluggish recovery in jobs and incomes. During the protracted recessions of the 1990s, Japanese companies tried hard to restructure, shedding many jobs in the process. As a result, they have become leaner and more nimble, thereby bolstering their ability to compete on the world market. The robust performance of carmakers is a good example.
The downside is that unemployment remains at one of the highest levels in postwar Japan, although, in fiscal 2004, it dropped below the 5 percent level to 4.6 percent for the first time in four years. Yet the employment picture is more depressing than the overall jobless rate indicates.
For example, the numbers of irregular workers, such as temporary and part-time workers, has increased steadily, making the job market more unstable. As shown by this spring’s hiring trends, employers keen to trim their payroll costs are moving to replace more of their regular employees with nonregular ones.
It is true that long-restrained wages are showing signs of edging up. Economics Minister Heizo Takenaka says “increases in corporate cash flows are raising the level of wealth in the household sector.” That seems, if anything, only half-true. The job situation remains harsh. Improving it is a sine qua non for domestic demand-led growth.
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