The 4.0 percent annualized growth of Japan’s economy in the April-June quarter — stronger than most forecasts by the private-sector and marking the longest streak of increase in the gross domestic product in 11 years — is still no cause for unguarded optimism over the course of the nation’s economy. While GDP growth in the last quarter was driven by capital investments by businesses and consumer spending, which together account for the bulk of domestic demand, a full-scale recovery in individual consumption remains precarious, given that wage growth continues to be slow despite the tightening labor demand. The government should not ease up on its efforts to turn the economy’s continuing uptrend into sustained growth.
According to the preliminary figures released by the Cabinet Office, the nation’s GDP in the last quarter grew 1.0 percent in real terms from the January-March period, or an annualized 4 percent assuming that this pace of growth is sustained for a year. The April-June growth was the sharpest since the January-March period of 2015 and picked up speed from the 1.5 percent increase in the first quarter of this year. The sixth quarterly GDP growth in a row was the longest streak since the one that ended in the April-June period of 2006. While exports — whose increase drove the economy’s upturn in recent periods — fell for the first time in four quarters, business investments rose 2.4 percent and consumer spending 0.9 percent. Combined with the 5.1 percent rise in public works spending and 1.5 percent growth in housing investments, domestic demand pushed up the economy by 1.3 percent.
The growth in personal consumption, which accounts for 60 percent of GDP, was supported by renewed demand for automobiles and household electric appliances, but is also believed to have been aided by favorable weather that pushed up spending by consumers. It’s far from clear whether we’re seeing a robust recovery in consumer demand. Behind the uncertainty over the course of consumer spending is stagnant growth in wages even as labor demand is the tightest in more than 40 years.
The jobless rate stands at 2.8 percent and the ratio of job openings to job seekers hit 1.51 on a nationwide average in June, with openings for regular full-time positions outnumbering those seeking such jobs for the first time since relevant statistics became available in 2004. Employment prospects are clearly on an upturn, with more and more businesses switching staff recruitment from part-time and other irregular statuses to full-time to cope with increasing difficulties in securing workers amid the growing manpower shortage. That, however, has not led to a rise in wages that would spur consumers to spend more.
Labor ministry data show that total cash wage payments per worker in June fell 0.4 percent from a year earlier for the first decline in 13 months. Wages also fell 0.8 percent on inflation-adjusted, net basis for the first fall in three months. Summer bonuses for employees of major firms declined nearly 3 percent from a year ago, marking the first fall in five years, according to a tally by Keidanren (Japan Business Federation). Per-household consumer spending in June rose 2.3 percent year-on-year — only after 15 months of consecutive decline. Even recent gains in consumer prices remain anemic — and the 2 percent inflation goal set by the Bank of Japan four years ago remains as distant as ever.
A redistribution of robust corporate earnings to the household sector remains slow, and if such conditions continue, the recent pickup in personal consumption may end up being a temporary phenomenon. And overseas demand — which led the economy’s growth until the previous quarter — is confronted with various risk factors, ranging from the ongoing confusion caused by the U.S. administration of President Donald Trump, tensions in Northeast Asia over North Korea’s ballistic missile and nuclear weapons programs and concerns over the collapse of bubbles in the Chinese economy. Despite the 4.0 percent growth in the April-June period, the path toward domestic demand-driven, self-sustained growth may still be iffy.
Significant gains in wages seem to hold the key to sustained recovery in personal consumption and domestic demand-led growth of the economy. The government and the BOJ should explore policy steps to drive the jobless rate even lower to a point where it will start to accelerate gains in workers’ wages, thereby expanding consumer spending and hopefully pushing up prices in a “good” inflation driven by demand.