GDP Decline: Implement Measures to Prevent Stalling of Economic Recovery

Editorial

15:00 JST, May 18, 2025

High prices have continued, and personal consumption remains weak. The impact of the tariffs imposed by U.S. President Donald Trump will become more serious in the future. The government needs to implement measures to support the economy.

The preliminary estimate of the nation’s real gross domestic product for the January-March quarter in 2025 showed an annualized decline of 0.7% year-on-year. This marks the first negative growth in four quarters. The GDP decline was largely due to the slow growth of personal consumption, which accounts for the majority of the GDP and edged up only 0.2% because of rising prices.

The sharp rise in the price of rice, a staple food of Japan, has dampened consumer sentiment. Demand for other everyday foodstuffs such as meat and vegetables remained weak, and demand for high-priced items such as automobiles was also sluggish.

Capital investment, the second pillar of domestic demand after personal consumption, increased by 5.8%. Investment in research and development and software remained active. Exports decreased by 2.3%, but this was largely due to a rebound from the previous quarter’s strong growth.

Japan is in a critical stage of shifting to a “growth-oriented economy” driven by both wage increases and investment. Wage increases have not kept pace with rising prices, and personal consumption lacks momentum. It is imperative to address this situation, which shows no signs of abating.

The government must first take measures to improve the situation in which stockpiled rice is not being distributed smoothly through the supply chain, in a bid to stabilize rice prices.

The adverse effects of the Trump tariffs on the Japanese economy will begin in earnest from now on. If exports of automobiles and other products decline while personal consumption remains weak, the economic outlook could deteriorate rapidly. This would dampen the momentum for wage increases and delay the realization of a virtuous economic cycle.

The ruling Liberal Democratic Party and its coalition partner Komeito plan to compile new economic measures before the House of Councillors election this summer. The parties should carefully analyze the impact of the Trump tariffs and take all possible measures to support corporate financing and other matters. It is also important to consider steps to protect households with low incomes.

However, emergency measures should not be confused with the nation’s basic policies.

As a measure to combat high prices, opposition parties are increasingly calling for a reduction in the consumption tax rate on a temporary basis or with limits to food items.

However, it is stipulated by law that the consumption tax will be used to fund social security services, including pensions, medical care and nursing care.

Changing the consumption tax system, which is part of the backbone of the national finances, into a temporary economic stimulus measure should be avoided. Lowering the tax rate could also lead to concern about a decline in social security services.

Furthermore, relying on the issuance of government bonds as a fiscal resource means passing the burden to future generations. There should not be a competition over handout policies with an eye on the upper house election.

(From The Yomiuri Shimbun, May 18, 2025)