Editorials

What last quarter's GDP says about the economy

The annualized 0.5 percent growth in gross domestic product for the October-December quarter confirms that the Japanese economy is continuing on an extended track of moderate growth. But the GDP’s growth for eighth consecutive quarters — the longest streak in the 28 years since the bubble boom of the late 1980s — does not warrant unguarded optimism over the path ahead. The economy’s growth is heavily reliant on overseas demand — whose prospects have been clouded by the turmoil in financial markets in recent weeks. What’s needed are greater efforts to pursue a more domestic demand-driven growth while the economy remains in a good shape.

The uninterrupted two-year run of GDP growth is the longest since the economy expanded 12 quarters in a row between 1986 and 1989 just as it was heading toward the peak of the asset-inflated bubble boom. The current cycle of expansion is deemed to have lasted 61 months — since Prime Minister Shinzo Abe returned to the government’s helm in December 2012 — to be counted as the second-longest boom cycle in the postwar period. The economy expanded 1.6 percent in real terms in 2017 for the sixth straight annual growth, while GDP in nominal terms rose 1.4 percent to a record ¥546 trillion.

Still, the growth in the last quarter lost speed from the 2.2 percent increase in the July-September period. Consumer spending grew 0.5 percent from the previous quarter, but that needs to be discounted against the 0.6 percent decline in the July-September period. It’s not yet clear whether the rise signals a full-scale recovery in personal consumption, which accounts for 60 percent of Japan’s GDP.

Capital investment by businesses, another key component of domestic demand, rose 0.7 percent for the fifth quarterly increase but lacks the strength to drive overall economic growth. Public sector investment fell 0.5 percent for the second consecutive quarter of decline, while housing investments dropped 2.7 percent. What pushed up the GDP most, after all, was the 2.4 percent increase in exports — the sixth quarterly rise in a row — on the strength of brisk demand in overseas markets. The economy still seems a long way from self-sustained, domestic demand-led robust growth.

In that respect, it is worrying that the recent turbulence in financial markets has cast a pall over prospects for the global economy, such as the rise in long-term U.S. interest rates, the worldwide turmoil in share prices and the yen’s rise against other currencies. While it’s not clear whether last week’s plunge in the New York stock market, which threw share prices in markets throughout Asia and Europe into confusion, would turn out to be a short-term correction, concern lingers that the U.S. Federal Reserve, on the back of favorable conditions in the American economy, might hike U.S. interest rates too fast. Further rises in long-term U.S. rates and stock market turmoil could potentially destabilize the world economy.

Officials emphasize that Japan’s economy remains on a solid footing despite the financial market turbulence. Many listed companies expect to renew their profit records in the business year ending in March. Those brisk corporate earnings have been driven by robust demand in overseas markets and the weak yen. Less stability in the global economy will hurt Japanese exports, along with currency exchange fluctuations. The recent financial market turmoils have put upward pressure on the yen, which hit a 14-month high in the mid-106 range to the dollar in Tokyo trading Thursday. A stronger yen might damage companies’ earnings, while further declines in Tokyo share prices threaten to dampen corporate investment and consumer spending.

The latest GDP data and the recent financial market turbulence support the case for greater efforts to put Japan’s economy on track for more domestic demand-driven growth. That will be easier said than done. What holds the key to such growth will be a sustained recovery in personal consumption, which continues to be held back by stagnant growth in wages even as the labor market is tighter than it has been in decades. Profitable businesses must offer more significant wage hikes for employees in the ongoing annual talks with their labor unions. But prospects of a stronger yen and further stock market turbulence might hold them back.

Given the potential sources of uncertainty over global growth, the risk of the Japanese economy losing steam should not be discounted. The government should be prepared to take policy actions in case a slowdown is feared, including possible fiscal measures.

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