Editorials

Domestic demand is key to growth

The annualized 1.4 percent GDP growth in the October-December period was less than a robust rebound from the 2.6 percent decline of the economy in the previous quarter, when consumer spending and corporate investments were hit by a series of natural disasters such as torrential rains that left more than 200 people dead in western Japan and a big quake in Hokkaido. There is little cause for optimism over the course of Japan’s economy as signs grow of a slowdown in overseas demand that had shored up the nation’s extended boom cycle over the past several years. The latest GDP data gives all the more reason for further efforts toward domestic demand-driven growth of the economy.

Consumer spending in the last quarter of 2018 recovered from a 0.2 percent dip in the previous three-month period to a 0.6 percent growth, but the 2.4 percent rise in capital investments by companies was not strong enough to offset the 2.7 percent fall in the previous quarter. Exports grew 0.9 percent, but due to the 2.7 percent increase in imports, the overall contribution of external demand to GDP growth was a minus 0.3 points — staying in negative territory for the third quarter in a row.

Particularly worrying are the growing signs of risk to the global economy, ranging from the trade war between the United States and China, decelerating economic growth in China, and the confusion surrounding Britain’s departure from the European Union, which cast doubt over robust demand in overseas markets continuing to fuel the growth of the Japanese economy.

In the wake of Cabinet-level trade talks between the U.S. and China in Beijing, optimism is emerging that the world’s largest and second-largest economies may have achieved progress toward a solution to their trade disputes, with Chinese President Xi Jinping suggesting that there was an “important” development in the trade talks and U.S. President Donald Trump reportedly considering extending the March 1 deadline for the talks to avert imposition of additional tariffs on Chinese imports, which would likely result in retaliatory measures.

But even if the U.S. and China should come to an agreement to settle their trade war, signs of a slowdown in the Chinese economy, whose 6.6 percent growth in 2018 was the smallest in 28 years, are becoming increasingly evident — and so is the impact on Japan. Japanese exports to China in December fell 7 percent from a year earlier, and sluggish shipments to China of smartphone parts and semiconductor production devices weighed down the rise in exports during the last quarter. In Britain, meanwhile, Prime Minister Theresa May remains unable to win Parliament’s endorsement of the deal her government struck with the EU on the terms of the country’s exit, and the prospect of a “no deal” Brexit is casting uncertainties over the European economy. The International Monetary Fund forecasts slower growth for the U.S., China and Europe this year.

In its monthly assessment of the economy in January, the government said the current boom cycle, which began in December 2012, has likely continued for 74 months to become the longest in the nation’s postwar history. However, some recent economic indicators, including the Bank of Japan’s tankan quarterly survey of business sentiments, point to a growing sense of caution over the economy in coming months, apparently reflecting the deepening uncertainties concerning demands in overseas markets. The possibility that the economy may have already hit a peak cannot be ruled out.

The October-December GDP data shows that growth was sustained as the pickup in domestic demand such as consumer spending and capital investments made up for the sluggish growth in exports. The increasing risk of a slowdown in overseas markets is all the more reason for making further efforts toward a transition to a domestic demand-driven growth of the Japanese economy.

The government is urged to take the lead in sustaining and building up the free trade system to promote global trade through such efforts as striking more multilateral free trade agreements and prodding the U.S. administration of President Donald Trump to change its protectionist “America first” trade policies. At the same time, it needs to do more on structural reforms at home to drive up the growth potential of Japan’s economy and deregulatory steps to beef up domestic productivity.

Private-sector companies should make efforts through capital investments to shore up domestic demand, while offering their workers more substantial wage hikes to boost personal consumption, whose growth continues to be fragile and uneven as inflation-adjusted net increase in per-household wage income continues to stagnate. Businesses are reportedly more wary of wage hikes than in previous years due to uncertainties over the world economy, but substantial raises, which hold the key to sustained recovery in consumer spending, are all the more important now given the unclear prospects of overseas demand.