The second quarterly contraction of Japan’s gross domestic product in a row should not prompt the Abe administration to prepare yet another stimulus package but instead to reassess whether its trademark policies are really working to prop up the economy.
The annualized 0.8 percent fall in the July-September GDP in real terms from the prior quarter, on the heels of the 0.7 percent decline in the April-June period, marked the second time the economy has shrunk for two consecutive quarters since Prime Minister Shinzo Abe returned to power in late 2012. But in a sense the latest recession may be more disappointing. While the previous one spanning the period of April to September 2014 was triggered by the first hike in the consumption tax in 17 years, the back-to-back GDP fall over the same period this year appears to highlight the underlying weakness of consumer spending and capital investment — which together account for more than 70 percent of GDP — raising doubts about the core scenario of “Abenomics.”
Personal consumption picked up 0.5 percent, but that wasn’t strong enough to offset the 0.6 percent fall in the April-June period, while capital investment by businesses declined 1.3 percent for the second quarterly fall. Increases in wages and summer bonuses appear not to have been robust enough to dispel consumer concern about the rising prices of daily necessities. Despite the surge in major companies’ earnings to record levels — aided by the yen’s fall against the dollar — businesses appear hesitant to boost their investments in view of the slowing growth of emerging economies — in particular China — and uncertainties over domestic demand in light of the nation’s declining population.
Responding to the weak GDP data, Abe has said he will quickly order his Cabinet to prepare an extra budget for fiscal 2015 — reportedly to the tune of ¥3 trillion. Noting that the economy remains on a modest path of recovery, the prime minister also said he would take steps to turn corporate profits into wage hikes and investments by businesses “to accelerate and expand the virtuous cycle of the economy.” But the data raise doubts about whether the virtuous cycle of private sector-driven growth — in which higher corporate earnings boost people’s wages and spending, thereby encouraging more business investments — has ever materialized in the nearly three years of his administration.
Abe vowed to beat the deflation that had gripped Japan since the 1990s with his much-touted “three-arrow” economic policy of massive monetary easing, aggressive fiscal spending and a “growth strategy” supposedly featuring bold structural and regulatory reforms. The “unprecedented” monetary stimulus featuring large-scale asset purchases by the Bank of Japan sharply drove down the yen’s value against the dollar, pushing the profits of major firms to record levels and raising share prices.
But even as the hefty earnings led the major firms to offer the highest raises for their employees in years consumer spending would not take off as people suffered net losses in their salary as prices rose faster than the wages, partly due to the weaker yen that pushed up cost of imports. The rise in prices has been somewhat offset by the steep fall in crude oil prices, but the higher costs of daily necessities such as food continue to weigh on household spending.
The Abe administration, which has used its pro-business policies such as corporate tax cuts as a tool to urge major companies to raise wages, is also stepping up pressure on the businesses to turn more of their profit into capital investment. In what has been billed as “public-private sector dialogue” with business leaders, members of the administration charge that it’s a “grave error in management judgment” for Japanese companies not to be making investments even as they are awash with record-level resources, pointing to their retained earnings, which accumulated to roughly ¥350 trillion as of 2014, an increase of ¥50 trillion in two years.
Since investment decisions constitute the very core of management strategy, it is understandable that business leaders have reportedly refused to make any serious commitments. They will make decisions to invest due to business reasons, not because the government tells them to. The administration will likely repeat the same message, but the GDP data seem to suggest that businesses will continue to base their investment decisions on the prospect of their markets.
Abe’s planned supplementary budget, to be submitted to the Diet early next year, will reportedly feature measures to beef up the farming sectors that could be affected by the recently concluded Trans-Pacific Partnership free trade accord. But the impact of such additional spending on the economy appears increasingly questionable, given that the roughly ¥3 trillion earmarked in the fiscal 2014 extra budget and spent since spring failed to reverse the GDP’s fall.
The prime minister has proclaimed that Abenomics has entered its second stage, hoisting new ambitious targets such as boosting the nation’s GDP to ¥600 trillion. But given the economic data, he should first take stock of what his policies have and have not achieved so far, and consider what needs to be done to realize the virtuous cycle that he keeps promising.
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