The nation’s economy has escaped a back-to-back quarterly decline, as shown by the preliminary data for the January-March period — which has been closely watched as a possible clue to whether Prime Minister Shinzo Abe will go ahead with the consumption tax hike in April 2017 as planned. Abe’s assessment for his tax decision aside, the GDP figures seem to testify to the mixed state of the economy, with signs for the months ahead looking hardly promising.
The GDP grew an annualized 1.7 percent from the previous quarter in real terms — on the heels of a revised 1.7 percent fall in the October-December period. Although the economy grew faster than the average private-sector forecast, a large part of the growth was attributed to the leap year effect of this February having one extra day. The 0.5 percent rise in personal consumption was not strong enough to offset the 0.9 percent decline in the previous quarter, while the 1.4 percent fall in capital investments, compared with the 0.24 percent rise in the October-December period, appeared to reflect the growing hesitancy of Japanese businesses to invest in the face of growing uncertainties over global growth.
Whether the latest GDP figures are encouraging enough for Abe to honor his tax hike commitment, or so discouraging as to prompt him to decide once again to postpone the hike, they appear to be yet another indication of the fragility of Japan’s economic growth. This fragility in turn continues to put into doubt whether the prime minister’s trademark economic policy, now in its fourth year, is working as intended. Growth has been uneven and less than robust since the April 2014 consumption tax hike dampened consumer spending. Even the Bank of Japan’s move into negative interest rates in February — after three years of massive monetary stimulus under Gov. Haruhiko Kuroda — appears to have provided little fresh impetus to boost bank lending, though it reportedly prompted homeowners to refinance their housing loans at the lower rates.
Average household spending marked year-on-year declines in nine out of the 12 months to March, with the 5.3 percent fall in March the sharpest since the same month of 2015. Given the stagnant private consumption and the fall in crude oil prices, the BOJ’s target of achieving an annual 2 percent inflation — introduced in 2013 in the Abe administration’s bid to bust deflation — continues to be pushed back.
The administration has vowed to fight deflation by generating a virtuous cycle of improved corporate earnings raising workers’ wages, stimulating consumer spending and triggering more business investments. Big companies earning record profits, aided by the yen’s fall against the dollar under the BOJ’s monetary stimulus, offered the steepest raises in years for their employees, but in terms of the national average, wage hikes have been slower than price increases — even though employment data are the best the nation has logged since the early 1990s.
And the reversal of the yen’s fall since the beginning of this year has clouded the economy’s prospects, pushing down share prices in Tokyo. The combined net profits of listed companies in their business year to March are estimated to have declined from the previous term for the first time in four years as the stronger yen pared their earnings from overseas sales in yen terms, and falling energy and materials prices caused large losses for trading firms.
Prospects for the current year to March 2017 also looks hardly promising. Toyota Motor Corp. expects its operating profit this year to plunge 40 percent from the record ¥2.85 trillion in the last year to March. “The tide has turned,” Toyota President Akio Toyoda said last week as he candidly assessed that his firm’s earnings have so far been “expanding beyond their real strength on the currency headwinds.” Other automakers similarly forecast that their weak yen-inflated profits will deflate. Their case underlines how the performance of many big Japanese manufacturers remains vulnerable to currency exchange fluctuations. Also adding to the nation’s economic woes will be the damage caused by the devastating quakes that hit Kumamoto last month, which will be reflected in the current quarter’s GDP.
Speculation has been building in recent weeks that Abe will again shelve the consumption tax hike — after postponing it once in 2014 by 18 months from October 2015 to April 2017. The last postponement came just before he dissolved the Lower House for a snap election — after the April 2014 hike caused a back-to-back quarterly fall in the GDP. Now Abe faces the triennial Upper House election in July, and there is talk that he might dissolve the Lower House again for another snap election to be held together with the Upper House race.
Since his 2014 decision, Abe has vowed not to postpone the tax hike again — unless the economy is hit by a major shock to the tune of the global recession following the 2008 collapse of Lehman Brothers or the 2011 Great East Japan Earthquake. Whether the economy is in such dire straits is debatable. But it does not appear to be experiencing the robust growth that Abenomics was touted to bring.
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