Despite its continuous expansion, Japan’s economy remains fragile. Personal consumption is sluggish and a serious gap exists in wages and other working conditions between regularly and irregularly employed workers. Major manufacturing companies may be enjoying strong performances, but that is not necessarily so for nonmanufacturing and smaller-size companies. While economies in industrial areas like Tokyo and Nagoya prosper, local economies in many prefectures are weak.
The current period of expansion entered its 59th month in December to become the longest post-World War II “boom,” surpassing the 57-month-long Izanagi boom from November 1965 to July 1970. But the people aren’t reaping the benefits of the boom because it has not been accompanied by wage increases or strong consumption.
The government’s task for 2007, therefore, is to get the fruit of the corporate sector’s success to spill over into the household sector and eradicate various gaps in the economy. Increasing personal consumption will be especially important since it accounts for slightly less than 60 percent of the nation’s gross domestic product.
The government forecast in mid-December that the economy would grow 2.2 percent in nominal terms and 2 percent in real terms, year on year, in fiscal 2007. It also said the nominal and real economic growth rate for fiscal 2006, which ends March 31, would be 1.5 percent and 1.9 percent, respectively. Both figures are down from the 2.2 percent nominal growth and the 2.1 percent real growth forecast in July. The December forecast says overall price-level movement will turn positive in fiscal 2007, meaning that the economy will timidly climb out of deflation.
If management agrees to increase workers’ wages during the annual labor negotiations, which have just started, it would help loosen the tight purse strings in the household sector. But the corporate sector has achieved its good results by carrying out rigorous restructuring efforts characterized by slashed labor costs.
This approach has led to a decrease in workers’ overall wages, on the one hand, and to polarization of the workforce into regularly and irregularly employed workers — such as part-timers and workers dispatched by agencies — on the other. Since the corporate sector is unlikely to abandon the practice of enhancing competitiveness through labor-cost restraint, labor may find it tough going in the talks this year.
The weakening of local economies in many prefectures amid the increasing number of working poor indicates that the economic fruit of major manufacturing corporations and the larger metropolitan areas are not creating a spillover effect on other components of the national economy. The administration of Prime Minister Shinzo Abe is pushing a high growth policy in order to stop polarization of the economy and to restore financial health. His approach is couched in the slogan “No financial reconstruction without economic growth.”
The administration’s policy is typified by the government Tax Commission’s proposal incorporated into the fiscal 2007 draft budget. The main pillar of the proposal is tax reductions to the tune of 450 billion yen for the corporate sector through such measures as allowing companies to fully write off capital investments and shorten depreciation periods and abolishing a tax on retained profits in medium- and small-size family companies.
While this proposal will help the corporate sector, the overall tax policy is likely to dampen consumption by the household sector. This year, all income tax breaks established over the past decade will be abolished, increasing the tax burden on individuals by about 1.2 trillion yen. This will act as a disincentive as far as consumption is concerned.
Aside from the 450 billion yen tax reductions for the corporate sector, the draft budget does not contain any strong strategic incentive to stimulate economic growth. Nor does it include impressive measures designed to narrow economic gaps. The draft budget envisages a surge in tax revenues by 7.58 trillion yen from the initial fiscal 2006 tax to an estimated 53.46 trillion yen, thanks mainly to growing corporate tax revenues. But there is no guarantee that the current economic expansion will continue.
Besides sluggish personal consumption, other factors cast a cloud over the Japanese economy. U.S. economic growth is likely to slow, affecting Japanese firms that rely on exports. The cheap yen may not last long. Overinvestments by companies with a large amount of reserves may suddenly shrink.
Given these factors, it will be all the more important to create solid domestic demand in the Japanese economy. The corporate sector should seriously consider how to fairly share their economic fruit with workers so that a solid foundation for continued expansion can be realized.
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