The Japanese economy entered the new year in good shape. Gross domestic product has grown for seven straight quarters through the July-September period and the current cycle of economic expansion, which began in December 2012, is believed to be the second-longest boom since World War II. The Nikkei 225 average on the Tokyo Stock Exchange opened the year sharply higher than the 2017 closing to hit a 26-year high. Economists are forecasting the 2018 will see continued modest growth. Barring a major shock originating overseas, there is a good chance the expansion will, by the end of the year, catch up with the 73-month-long boom of 2002 to 2008 and become the longest in the postwar period.
Such a rosy assessment of the economy may not be shared by many consumers. Despite robust corporate earnings and the booming stock market, consumer spending remains weak, thanks in large part to stagnant wage growth despite the tight labor market. This year should be one in which increased business profits will find their way into households in ways that contribute to self-sustained growth driven by domestic demand. The government needs to take policy steps to facilitate this, and businesses should share their record profits with employees through significant wage increases.
Labor market conditions have improved steadily under the five years of Abenomics. In November, the jobless rate hit a 24-year low of 2.7 percent, and the ratio of job offers to job seekers reached 1.56 — the highest in about 44 years. As the manpower shortage tightens, openings of regular full-time positions exceeded the number of people seeking such jobs for the first time last year.
The tight labor market, however, has not resulted in sufficient wage hikes to drive up household spending. Adjusted for inflation, the real wages of workers declined five months in a row to October. One explanation given for the stagnant wage hikes is the lack of improvement in labor productivity at Japanese firms — and that productivity won’t go up because the job increases are mostly in labor-intensive businesses in nonmanufacturing sectors.
The latest GDP data — for the July-September quarter — illustrate the mixed picture of the economy. The economy grew a robust 2.5 percent from the previous quarter on an annualized basis. But much of the growth was attributed to brisk exports on the strength of robust overseas demand. Of the two key components of domestic demand, capital investments by businesses rose 1.1 percent, but personal consumption, which accounts for 60 percent of the GDP, declined by 0.5 percent.
The steady growth of the world economy is not without uncertainties, including the potential negative impact of interest rate hikes in the United States on emerging economies as well as a possible slowdown in China’s growth. A heavy reliance on overseas demand leaves growth in Japan vulnerable. The nation needs to make more efforts to boost its own domestic demand.
The 57-month-long “Izanagi” boom from 1965 to 1970 — which the current expansion cycle is deemed to have overtaken last fall as the second-longest in the postwar period — was driven by robust consumer demand for durable goods by a population whose income shot up alongside the rapid growth of the nation’s economy. In contrast, consumers’ appetite to spend remains sluggish in the current economic recovery.
It seems clear that a strong recovery in consumer spending holds the key to self-sustained, domestic demand-led growth of the economy — and that significant wage hikes by companies making record profits are long overdue. Prime Minister Shinzo Abe has urged businesses to increase their workers’ pay by at least 3 percent in the wage negotiations this spring — after the raises in 2016 fell short of the levels offered in preceding years. The Japanese Trade Union Confederation (Rengo) is calling for a raise of about 4 percent.
Over the past five years, the aggregate wages of workers in real terms have been roughly flat on a year-on-year basis. The tightening conditions in the labor market should set the stage for more substantial wage hikes. The consumer price index in November rose 0.9 percent from a year ago for the 11th monthly increase in a row, but much of the gains was attributed to rising energy-related costs due to higher crude oil prices. A strong expansion in consumer spending on the strength of sufficient wage hikes should usher in a “good” increase in prices that helps create a virtuous cycle of the economy and finally pull the nation out of the grip of deflation.
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