Editorials

Wanted: Domestic demand-driven growth

Despite experiencing the longest streak of growth in 16 years, Japan’s economic picture remains mixed, with increased exports led by robust overseas demand driving the growth amid weak consumer spending. Major companies expect to earn record profits for the second year in a row, and share prices in the Tokyo Stock Exchange have hit a post-bubble boom high. But even as the labor market is the tightest in 40 years, wage hikes remain low and growth in personal consumption is stagnant. To achieve more self-sustained growth, the government needs to explore further policy steps to spur domestic demand, and businesses are urged to translate more of their profits into higher wages.

The 1.4 percent annualized real-term growth of the nation’s gross domestic product in the July-September period over the previous three-month period marked the seventh quarter of growth in a row — the longest streak since the GDP expanded for eight straight quarters between 1999 and 2001. Personal consumption, which accounts for 60 percent of the GDP, dipped 0.5 percent for the first decline in seven quarters, but a 1.5 percent increase in exports, led by the brisk shipment of automobiles and electronics parts to the U.S. and Asian markets, shored up the economy. Domestic demand as a whole, however, pushed down the GDP by 0.2 percent. Growth decelerated from the 2.6 percent increase in the April-June period.

The current cycle of economic expansion, which began just as Prime Minister Shinzo Abe returned to the government’s helm in December 2012, is believed to be the second-longest boom in Japan’s postwar history — surpassing the 57-month Izanagi boom from 1965 to 1970 — and it appears set to continue even longer. But the average annual growth during the current cycle stands at 1.4 percent — much lower than in past booms like the asset-inflated bubble boom through the early 1990s. GDP data for the July-September period appears to mirror such a not-so-robust state of growth.

Business earnings have been aided by the weak yen triggered by the Bank of Japan’s monetary easing program as well as brisk overseas demand. Companies listed in the TSE’s first section combined reportedly expect their net profits in the year to next March to rise 8.8 percent to reach record highs for the second year in a row. The Nikkei average on the TSE, which more than doubled in the nearly five years under Abe’s watch, hit the highest level since January 1992 at the beginning of this month.

Still, the ongoing streak of economic growth lacks a strong engine to drive domestic demand. The last quarter’s frequent typhoons and rainy summer were cited as factors behind the dip in consumer spending. But the underlying weakness in personal consumption has continued since the last consumption tax hike in April 2014. The 0.7 percent increase in consumer spending in the April-June quarter gave rise to hope that such spending would lead to a sustained increase, but that hope appears to have been short-lived.

Despite the robust corporate profits, wage growth continues to stagnate as businesses hesitate to give significant raises that push up fixed manpower costs. Companies remain cautious toward new investments in view of the domestic market’s tough prospects against the backdrop of a declining population. The virtuous cycle of the economy that Abenomics has sought to kick-start — improved corporate earnings pushing up wages and consumption, and in turn shoring up business profits — has yet to materialize.

It seems clear that the key to domestic demand-driven growth lies in the expansion of consumer spending — and that stagnant wages are restraining household consumption. Brisk corporate earnings are not being sufficiently turned into higher wages. While the retained earnings of Japanese companies — profits accumulated as internal reserves after being spent on shareholder dividends and investments — in all non-financial sectors combined increased by roughly ¥100 trillion to ¥406 trillion between fiscal 2012 and 2016, their total manpower expenses are reported to have increased by just ¥5 trillion over the same period. The labor share of business profits is on a decline as major firms churn out record earnings.

For the fifth year in a row, the Abe administration is urging businesses to raise the wages of their employees in annual salary talks next spring — this time specifically calling for a 3 percent increase — after the pay hikes by major firms last spring fell short of the levels in previous years. Businesses making profits should consider more substantial wage increases as a measure to shore up consumer spending. The government, for its part, is urged to explore structural reforms of the economy that can lead to greater self-sustained growth.