The expansion of Japan’s gross domestic product for the fourth quarter in a row hardly seems encouraging. The slow growth of the economy has been losing speed for three consecutive quarters amid a pattern of weak domestic demand, in particular consumer spending, offset by brisk exports. As uncertainties hang over offshore demand, the Abe administration should focus more on policy steps to boost growth driven by personal consumption, and businesses making profits are urged to contribute through significant pay hikes for their workers in ongoing annual wage negotiations.
The annualized 1.0 percent growth in the October-December period over the previous quarter belies the stagnant domestic demand. Consumer spending, which accounts for 60 percent of GDP, fell 0.01 percent for the first decline in a year, though a 0.9 percent pickup in capital investments offset the fall to leave domestic demand nearly flat. Growth has been slowing, falling from 2.3 percent in the first quarter to 1.8 percent in the second and 1.4 percent in the third.
Growth in the last quarter was driven by a 2.6 percent increase in exports, attributed to brisk semiconductor shipment to China and auto sales in the United States, but it’s unclear whether the upward trend will be sustained in the coming months. While the slowdown in China’s economy remains a major source of concern for global demand, the protectionist trade policies of U.S. President Donald Trump adds to the unpredictability of export-driven growth. Vehicle exports to the U.S. could come up during the bilateral economic dialogue that Prime Minister Shinzo Abe agreed to create in his recent talks with Trump.
Trump has charged that Japan drives the value of the yen lower to boost its exports. Whether that criticism is legitimate or not, the problem is that the yen’s weakness in recent years — a result of the Bank of Japan’s 4-year-old massive monetary easing operation — inflated the earnings of export-oriented major firms to record levels but has not significantly expanded consumer spending.
Rising prices of vegetables and unseasonably warm weather during the October-December quarter were singled out as factors for the dip in consumer spending. But the weakness in personal consumption seems nothing temporary. Per household spending in December fell 0.3 percent from a year earlier for the 10th straight month of decline.
A year has passed since the BOJ launched its negative interest rate policy — charging fees on commercial banks’ deposits in their accounts in the central bank — to facilitate more lending to consumers and businesses. But the policy does not appear to have had much of an impact to encourage more spending and push up prices. The average consumer price index in 2016 fell 0.3 percent from the previous year for the first annual decline since 2012, marking a setback in the administration’s bid to bust deflation. The fall in prices appears to be easing off, with the 0.2 percent decline in December — the 10th monthly fall in a row — shrinking from the previous month with the recent depreciation of the yen and higher crude oil prices pushing up cost of imports. The recovery in prices will be welcome if it signals receding deflationary pressure. But rising import prices could further dampen consumer appetite for spending.
Consumer spending remains slow because wage gains have been sluggish — and often outpaced by the rise in prices. In 2016, workers’ wages gained 0.7 percent on an inflation-adjusted basis for the first rise in five years, but that was partly the result of falling prices. Per capita wages declined 0.4 percent on a net basis in December for the first fall in a year. Job market conditions continue to steadily improve under the Abe administration’s watch, but that has not led to sufficient wage increases to spur consumption.
Despite repeated calls by the government for continued raises, major companies, in particular the export-oriented industries such as automakers that set the trend in the wage negotiations, are more guarded about significant hikes this year, citing the uncertainty hanging over their business environment exacerbated by unpredictable policies of the new U.S. administration. Keidanren Chairman Sadayuki Sakakibara says that despite wage hikes, people are hesitant about spending more because of uncertainties over the future of the social security system. That is indeed the government’s job — to ease consumer concern through reform of the social security system. But companies should also take whatever steps they can to encourage consumers to spend more and lift the economy.
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