Japan’s latest GDP data for the second quarter of this year confirms the underlying weakness of consumer demand and the seemingly limited scope of the benefits from the economic policies of the administration of Prime Minister Shinzo Abe. The first contraction of gross domestic product in three quarters may be a temporary dip, as economic growth is widely predicted to return to positive territory in the July-September period. Still, policymakers should think again why the household appetite to spend remains weak despite robust corporate earnings and wage hikes at large firms.
The economy shrank by an annualized 1.6 percent in real terms in the April-June period from the previous quarter as consumer spending, which accounts for roughly 60 percent of the nation’s GDP, fell 0.8 percent for the first decline since the same period of last year and exports plunged 4.4 percent for the first decline in six quarters due to sluggish shipments to Asia and U.S. markets.
An average forecast by private-sector think tanks points to a GDP growth of an annualized 1.8 percent in the three months to September, with exports expected to pick up and the intense summer heat projected to have pushed up sales of seasonal goods. However, concern lingers over the prospect of export growth as signs abound indicating a slowdown of the Chinese economy, as illustrated by the devaluations of its currency last week.
Since returning to the helm of government in December 2012, Abe has vowed to revitalize the economy as a priority of his administration. With his much-touted “Abenomics” economic program now in its third year, economic growth remains uneven and seems far from robust. While the Bank of Japan’s unprecedented monetary easing and the subsequent fall of the yen pushed up corporate earnings and share prices, household spending has slumped since the April 2014 hike in the consumption tax as prices rose faster than wages for more than two years. Even as major firms raised the pay for their workers for the second year in a row, household spending declined on a year-on-year basis in 14 of the 15 months since the tax hike to June.
The Abe administration should not respond to the GDP’s fall by introducing more of what it already has done. In particular, additional monetary stimulus by the BOJ could have more adverse effects than benefits on consumer spending by pushing the yen’s value even lower and triggering more price hikes. One of the factors behind the continuing slump in personal consumption is the broad-based price rises in food products and the food service industry, due to the higher costs of imported foodstuffs. The weaker yen has brought record numbers of inbound tourists to Japan, on whose robust demand the domestic retail industry has come to rely a great deal. But it must not be forgotten that the yen’s fall is hurting many Japanese consumers in various ways.
The steep fall of the yen under the Abe administration has led to a surge in the earnings of major global firms, but exports have not increased as much since many companies had already shifted their production overseas where demand is growing. In addition, increasing uncertainties over the course of the Chinese economy, whose slowdown could put a brake on worldwide growth, cloud the prospects for Japanese exports.
Benefits of the weak yen, on the other hand, have eluded many small and medium-size firms as they bear the brunt of surging cost of imported materials. In a recent Kyodo News survey of governors of the nation’s 47 prefectures, 60 percent of them said that the economy in their prefecture has not recovered to levels before the post-consumption tax hike slump, and roughly half said the economic gap between large metropolitan areas and the rest of the country has expanded under the Abe administration. Such results underscore the uneven benefits of Abenomics across the country. The administration should pay more attention to sectors that have not gained much from its economic policies.
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