More reforms to drive up domestic demand needed

The annualized 0.6 percent fall in Japan’s gross domestic product for the January-March period — the first decline after eight consecutive quarters of growth — may just be a temporary dip in an economy deemed to be in the middle of the second-longest boom cycle in the nation’s postwar history. But the GDP data released this week by the Cabinet Office also underlines the fragility of the extended recovery that relies heavily on overseas demand in the absence of a robust, domestic demand-driven engine of growth. Given the uncertainties that hang over the course of the global economy, the government needs to try all the harder to press ahead with structural reforms to create new homegrown avenues of growth.

Both pillars of domestic demand stagnated: Consumer spending fell 0.001 percent, compared with a 0.2 percent gain in the previous quarter, due to declines in smartphone sales and a spike in vegetable prices due to bad winter weather that dampened consumption. Capital investments by businesses dropped 0.1 percent for the first decline in six quarters — defying market forecasts that business investments remain steady. Housing investments also fell 2.1 percent.

Exports, whose robust increases have driven the economy’s growth so far, rose 0.6 percent for the third quarterly increase in a row, but the expansion lost steam from the 2.2 percent rise in the October-December period, due to a slowdown in smartphone-related shipments to Asian markets.

Economic revitalization minister Toshimitsu Motegi said the government is unchanged in its assessment that the economy remains on a path of moderate recovery. A majority of private-sector economists seems to agree that the upward trend of the economy will continue, bolstered by steady overseas demand. Still, the GDP data for the first quarter of 2018 once again highlights the lack of a powerful driver for the economy on the home front — which is even more worrying as demand for exports shows signs of slowing down.

Recent indicators seem to paint a mixed picture of the economy. The Bank of Japan’s quarterly tankan survey released in March found that business sentiment among large manufacturers had declined for the first time in two years — with companies expecting conditions ahead to turn for the worse.

The combined net profits of listed companies are estimated to have renewed the record high in their business year to last March. However, these robust corporate earnings have not directly led to brisk expansion in consumer spending, which accounts for 60 percent of GDP. In March, per household spending on an inflation-adjusted basis fell 0.7 percent from a year ago for the second monthly decline in a row. Steady improvement in the employment situation continues, as shown by the tightest labor demand in decades, but wage increases remain largely offset by rising prices, which portends ill for a full-scale recovery in consumer spending.

Major companies have earned record profits on the strength of the yen’s weakness and brisk overseas demand in recent years. Faced with unstable domestic demand, they will be vulnerable to possible turbulences in the overseas economy.

The possibility of worsening trade friction between the United States and China, which could cause global trade to shrink, casts a shadow over the course of the world economy, along with the recent spike in crude oil prices to 3½-year highs amid growing Middle East tensions following the U.S. withdrawal from the Iran nuclear deal.

Rising energy prices might further dampen consumer spending. Listed companies that have disclosed their earnings for the last business year reportedly expect their profits to decline in the year to March 2019 as they grow increasingly wary of an upturn in the yen’s exchange rate.

Japan’s GDP had grown uninterrupted for two years through the October-December quarter — the longest consecutive growth since the late 1980s bubble boom. The economy’s boom cycle that began under the helm of Prime Minister Shinzo Abe in 2012 may be on course to become the longest in postwar history.

The setback in the January-March period doesn’t seem to have spelled an end to the trend, but it does shed light on the risk that the ongoing recovery might lose steam amid possible turmoil in the world economy. That is all the more reason for the nation to take steps to shore up domestic demand.

The latest GDP data should serve as a cue for the government to speed up efforts for structural reforms such as deregulation to generate new sources of growth at home.