High Growth Lacking Domestic Demand does not Warrant Optimism

Editorial

15:30 JST, August 16, 2023

Despite the high growth rate, personal consumption lacks momentum amid high prices, a situation that does not warrant optimism. To achieve a domestic demand-led economic recovery, the government must focus on creating a virtuous cycle in which wage hikes lead to increased consumption.

The preliminary real gross domestic product (GDP) for April-June 2023 increased by an annualized 6.0% from the previous quarter, marking positive growth for the third consecutive quarter, far exceeding the advance estimates of private research institutes.

The actual value of real GDP also reached a record high of ¥560.7 trillion, and it can be said that these figures indicate that the recovery from the coronavirus pandemic is making steady progress.

However, this high growth was brought about by external demand. Exports grew 3.2% over the previous quarter. Exports of automobiles increased as the shortage of semiconductors eased. Consumption by foreign visitors to Japan, which has recovered rapidly, is also counted as exports in GDP.

In addition, imports fell 4.3% due to declines in crude oil, pharmaceuticals and mobile phones, among other products. A decline in imports is a factor that boosts GDP.

Foreign demand depends on overseas economies, and the outlook is uncertain. The key is domestic demand, which is noticeably weak.

Personal consumption, which accounts for the majority of GDP, declined 0.5% from the previous quarter, the first decline in three quarters.

While eating out and accommodations increased due to the normalization of economic activities, consumption of items such as food and large household appliances fell. It is believed that consumers have become thriftier as prices continue to rise.

This may be because corporate wage increases have not kept pace with price hikes.

Inflation-adjusted real wages remained below the level of the same month of the previous year for 15 consecutive months until June. In the shunto spring labor wage negotiations this year, the rate of wage increases by major companies reached the highest level in 31 years, but this has not become sufficiently widespread, including to small and midsize corporations.

The minimum wage, the wage base for all workers, is expected to reach the ¥1,000 range for the first time on average nationwide, with the estimated range of increase for fiscal 2023 at a record high.

To bring about a full-fledged recovery in personal consumption, it is essential to continue the high wage hikes next year and beyond, and to ensure that they are widely disseminated. The hope is that the government will further expand support measures, such as through taxation and subsidies, to make it easier for small and midsize enterprises to raise wages.

Corporate capital investment, another pillar of domestic demand, remained almost unchanged from the previous quarter. Investment in decarbonization and labor-saving measures to deal with labor shortages should be important, but growth has been sluggish in these areas.

Corporate executives need to be aware that aggressive investment of funds by companies in wages and capital investment is essential for an economic recovery led by domestic demand.

(From The Yomiuri Shimbun, Aug. 16, 2023)