Japan: Slow liftoff has been added to your bookmarks.
The economy is having trouble taking off; areas of concern include slowing exports, consumer and industrial sectors, and retail sales. First-quarter GDP growth provides hints on the path of the economy.
The Japanese economy is having trouble taking off. Observers note several areas of concern:
The government hopes that corporations will pass strong profits on to workers in the form of higher wages, thus boosting spending, but this has not yet happened.
First-quarter GDP growth provides hints about the path of Japan’s economy. The economy actually grew strongly in the first quarter, with real GDP rising at an annualized rate of 2.4 percent—far better than the 1.6 percent growth in the Eurozone or the decline in output in the United States. However, much of Japan’s growth stemmed from an accumulation of inventories; when this is excluded, real GDP grew at a rate of only 0.7 percent. Moreover, the massive growth of inventories in the first quarter means that businesses may not boost production much in the second quarter. This bodes poorly for second-quarter growth. Thus, although Japan came out of recession in the fourth quarter of last year, growth since has been relatively anemic.
The government’s GDP report contained positive and negative elements. Consumer spending and nonresidential investment both grew at a moderate rate of 1.4 percent, while residential investment soared 7.5 percent. Government spending grew modestly, even as government investment declined sharply. Interestingly, although exports grew at a blistering rate of 9.9 percent, imports grew even faster at a rate of 12.0 percent, meaning that net exports actually made a substantial negative contribution to GDP growth. This report suggests that the drop in the yen’s value initially paid dividends in terms of export competitiveness. Domestic demand, though, remains relatively weak, and the modest increase in business investment—the first rise in four quarters—is nevertheless disappointing.4
Another positive element concerns corporate profitability, which the yen’s sharp drop has boosted: For the fiscal year that ended in March, 30 percent of large publicly traded companies reported record profits—the highest percentage since 2006—and total profits were up 6.7 percent from the previous year, hitting a record volume. The companies that did especially well, benefiting from the cheap yen, were those with substantial export sales or overseas operations, as well as industrial companies, boosted by falling oil prices. On the other hand, rising import prices and weak domestic demand hurt many domestically oriented nonmanufacturing companies. The rise in overall profitability has led to a surge in dividend payments to shareholders, and the question now is whether strong profitability will boost investment, which, lately, has been relatively weak. The government also continues to hope that companies will elect to boost compensation, thereby stimulating increased consumer spending.