Editorials

Does the longest postwar boom cycle mean much?

The government’s assessment that the current cycle of economic expansion is now on par with the longest in postwar history may be no cause for celebration for many of Japan’s consumers. While the economy is on an extended but moderate growth trend, wage raises remain anemic despite the extremely tight labor market and consumer spending weak even as big companies earn record profits. The key challenge going forward continues to be how to enable consumers at large to feel the economy’s growth as their own through more robust and broad-based wage increases.

The judgment that the economy continues to be in a moderate recovery, in the government’s monthly report for December, extends the ongoing cycle of expansion, which began in December 2012, to 73 months — equal to the longest postwar expansion cycle from 2002 to 2008. The government also officially confirmed earlier that the current expansion cycle surpassed the second-longest postwar expansion period — the so-called Izanagi boom from 1965 to 1970 — as of September 2017. But while the economy enjoyed double-digit annual growth during the Izanagi boom, which took place toward the end of the nation’s rapid post-World War II growth, the average annual growth during the current boom cycle so far comes to a mere 1.2 percent — even lower than the 1.6 percent during the 2002-2008 boom, in which, like in the ongoing boom, many consumers were said to find it hard to share the sense of a strong expansion.

Finance Minister Taro Aso remarked that it is a problem “of sensitivity” on the part of the people who feel that their wages are not rising enough. But in fact, workers’ real, inflation-adjusted wages in October fell 0.1 percent from a year earlier for the third monthly decline in a row, as prices rose faster than their pay. Real wages declined by 0.2 percent in 2017. Even on a nominal basis, wage growth in October rose by a mere 0.4 percent. The sluggish wage growth is behind the slow recovery in private consumption, which accounts for 60 percent of Japan’s GDP and, even as the Bank of Japan’s massive monetary stimulus program has gone on for over five years now, the central bank’s 2 percent annual inflation target remains nowhere near in sight.

The Izanagi boom was driven by a robust growth in consumer spending, backed by steady increases in workers’ wages and the spread of such consumer durables as automobiles, air conditioners and color TV sets, as well as capital investment by businesses. The current boom corresponds to the second administration of Prime Minister Shinzo Abe, who returned to the government’s helm in December 2012, and his Abenomics policy featuring the BOJ’s unprecedented monetary easing program. Earnings at major firms with global operations surged to record levels, aided by the yen’s depreciation against the dollar under the BOJ program as well as strong demand in overseas markets. However, workers’ wages have not increased as much as expected, and growth in consumer spending continues to be fragile — particularly after the slump that followed the April 2014 consumption tax hike to 8 percent. That the government has since twice postponed the planned increase to 10 percent — and that it is preparing a heavy spending package that nearly offsets the extra burden on households from the hike next October — testifies to the fragility of consumer demand as growth in households’ disposable income remains sluggish.

Share prices surged during the ongoing boom cycle. The Nikkei 225 average on the Tokyo Stock Exchange has more than doubled since Abe took over the helm. In early October, the index rose to its highest in 27 years, renewing a post-bubble high. But the recent stock market volatility around the world — in which the Nikkei plunged sharply to fall below the 20,000 point on Tuesday for the first time in 15 months — reflects the growing uncertainty over the course of the world economy that has underpinned overseas demand. If the Nikkei fails to recover to the previous year’s closing price of 22,764 by the end of the week, it will be the first time in seven years that share prices end the year lower than a year earlier.

This volatility is yet another indication of the vulnerability of the ongoing upward trend of the economy. It is likely that the current boom cycle will become the longest in the nation’s postwar history, statistically. But what is needed are efforts to turn the boom into a sustained expansion driven by domestic demand backed by stronger consumer spending based on more substantial increases in wages, and policy measures to facilitate that.