The Cabinet Office has announced that Japan’s gross domestic product for the April-June period grew 0.1 percent, or an annualized 0.5 percent, in real terms from the previous quarter. This points to slowing economic growth in Japan, although economic activities as a whole continue to expand.

The growth figures are weaker than the 0.8 percent (annualized 3.2 percent) for January-March and the 1.3 percent (annualized 5.4 percent) for October-December 2006. On the positive side, nominal GDP showed a greater growth rate (0.3 percent) than real GDP, reversing the previous quarter’s trend. The nominal GDP figure reflects more accurately how economic conditions are felt by consumers and enterprises than the real figure.

In addition, the domestic demand deflator, a key measure of domestic price trends, rose 0.2 percent, reversing the 0.1 percent decrease in the previous quarter and representing the first increase since the July-September 2006 quarter. This means that deflationary pressure has somewhat weakened.

Economics and fiscal policy minister Hiroko Ota said there has been no change in the fundamental direction of the economy and that the recovery is continuing. But optimism about the prospect of the Japanese economy, at least in a short term, is not warranted. Exports for April-June grew only 0.9 percent from the previous quarter — a large drop from the 3.4 percent growth for the January-March period. The drop in export growth is mainly attributable to unstable economic conditions in the United States, as indicated by defaults in the U.S. subprime mortgage market. Exports have failed to help push up GDP. Most contributions have come from domestic demand.

Capital spending, a key engine of the nation’s economic recovery, expanded by 1.2 percent, assisted by equipment investment in such areas as electronics, communications and construction — an improvement from 0.3 percent in the previous quarter. The problem is that capital spending is the only vigorous component of the nation’s economic activities. The growth rates of other activities such as exports, consumer spending and home investments have declined. Housing investment decreased by 3.5 percent, the second consecutive quarter-to-quarter decrease. The previous quarter had seen a 0.8 percent decline.

Consumer spending, which accounts for about 55 percent of GDP in real terms, grew by only 0.4 percent, down from the 0.8 percent for the January-March period and the 1.1 percent from the October-December 2006 period. Spending for recreation, sports services and expensive luxurious items did not increase. One reason for sluggish consumer spending is the abolition of deductions for income and residential taxes, which led people to tighten their purse strings. But the fundamental reason for stagnant consumer spending is that high profits realized by the corporate sector have not adequately benefited the household sector in the form of higher wages, although the unemployment rate in June came down to a nine-year low of 3.7 percent.

According to the health and labor ministry, monthly wages in June, including bonus, decreased by 1.1 percent from the same month a year before, representing a drop for seven consecutive months. The Cabinet Office says aggregate wages for employed people for the April-June period grew only 0.2 percent in nominal terms from the year before and 0.1 percent nominally from the previous quarter (a 0.1 percent decrease in real terms). The Cabinet Office says that while the number of employed people is increasing, the per capita wage is decreasing.

The figures related to GDP released by the Cabinet Office match what is said in the government’s fiscal 2007 economy and public finance white paper published Aug. 7. It pointed out that the sluggishness of wage growth in contrast to the good performance of the corporate sector makes consumers feel that they are not sufficiently reaping the benefit of the recovery.

It said that an increase in the percentage of irregular workers such as part-time workers and temporary workers dispatched by employment agencies in the total workforce is pushing down the level of the per capita wage. In the latter half of the 1980s, these workers accounted for less than 20 percent of the total workforce. But they now account for about one-third. The white paper also mentioned such factors as the retirement of baby boomers in large numbers, resulting in a loss of a sizable portion of workers’ aggregate wage, as well as wage reductions for local government workers.

The government and businesses should realize that keeping wages low will lead not only to weaker domestic demand but also to a deterioration in the quality of the workforce, thus weakening Japan’s international competitiveness.

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