Japan’s economy has expanded for the fifth quarter in a row — the longest growth streak in 11 years — with the annualized 2.2 percent real-term gain in the January-March gross domestic product from the previous quarter picking up speed from the 1.4 percent rise in the October-December period. But few would characterize the expansion as robust domestic demand-driven growth. Despite the record-high earnings of major businesses, consumer spending remains weak as increases in wages stagnate. Greater efforts need to be made to translate strong corporate earnings into higher domestic demand through more wage hikes and investments.
Personal consumption, which accounts for 60 percent of the GDP, grew 0.4 percent from the previous quarter. But that is deemed attributable to the dearth of negative factors that dampen consumption, such as rises in fresh food prices and unseasonably bad weather in the January-March period. While capital investments fell 0.2 percent, it was the 2.1 percent increase in exports most responsible for the continued expansion of the economy.
The Bank of Japan’s tankan survey in March found that business sentiment among big manufacturing firms improved for the second quarter in a row, aided by the yen’s weakness and a pickup in overseas markets. Last month, the central bank upgraded its assessment of the economy as being in a moderate “expansion” — the first use of such a description in about nine years.
Such confidence in the state of the economy, however, does not appear to be broadly shared by consumers. Per household consumer spending in March fell 1.3 percent from a year earlier for the 13th consecutive monthly decline. Consumers’ continued restraint on their daily expenditures have led many supermarket and convenience store chains to cut prices on their products in a move reminiscent of the deflation period.
While various explanations have been made on consumers’ hesitancy to spend more, what seems clear is that wage increases are stagnating even as big firms earn record profits and the labor market looks very tight. According to a tally by the Keidanren business lobby, pay raises by major companies in this year’s annual spring wage negotiations with their unions reached an average of 2.18 percent — just slightly lower than a year ago — as the Abe administration kept up its pressure on profitable companies to raise wages. Labor ministry statistics show, however, that per capita nominal wages in March were down 0.4 percent year on year for the first decline in 10 months — meaning that wages remain little changed from a year earlier.
Wage increases continue to be weak even though the jobless rate is on a 22-year low and the ratio of job openings to job seekers is the highest in more than 26 years. Stagnant wages are clearly a factor behind the underlying weakness in household spending, which puts a drag on economic growth.
Corporate profits remain on an uptrend. Earnings of export-oriented major firms have been inflated in yen terms due to the currency’s weakness against the dollar under Abe’s watch. The latest tally by Mizuho Securities of 1,128 nonfinancial companies, accounting for 86 percent of those firms listed on the first section of the Tokyo Stock Exchange, showed that their combined net profits in the year to last March gained 12 percent over the previous year. It is expected that the profits of the listed firms for the latest business year will reach record highs.
While automakers and electronics firms reported lower profits as the yen’s upturn in the early half of the year pared their earnings, nonmanufacturers such as general trading houses, which benefited from the recovery in resources prices, construction and real estate sectors thanks to rising demand ahead of the 2020 Summer Olympics and Paralympic Games in Tokyo, and information and communications firms saw their profits surge. Forecasts give a positive outlook for corporate earnings in the business year to March 2018.
A key challenge for Japan’s economy then seems to be how the strong corporate profits should translate into economic growth — in particular how to share the benefits of increased earnings of big companies with the household sector. The fall in capital investments in the January-March period despite the companies’ record profits may reflect caution on the part of the businesses over the course of the world economy, including unpredictability of the policies of the United States under President Donald Trump. They also remain guarded against significant increases in manpower expenses.
But the companies should realize that a virtuous cycle of the economy, in which higher corporate profits boost people’s wages and consumer spending, in turn triggering more business investments, will continue to be out of reach if wage hikes remain low.