GDP Contraction: Enterprises Should Return Profits to Increase Domestic Demand

Editorial

15:39 JST, November 17, 2023

The economic recovery from the COVID-19 pandemic has come to a standstill due to high prices. It is crucial to urge enterprises to raise wages above inflation and actively invest their capital to achieve a virtuous economic cycle.

The preliminary real gross domestic product (GDP) for the July-September 2023 quarter declined by an annualized 2.1% from the previous quarter, the first drop in three quarters since the October-December 2022 quarter.

As consumers became thriftier amid rising prices, private consumption, which makes up the majority of GDP, was sluggish at a 0.04% decline from the previous quarter. Continuing price hikes on food items was at the center of this.

Corporate capital investment also declined 0.6%. Spending in semiconductor production equipment declined and investment in software did not increase.

The situation is worrisome in which both consumer spending and capital investment, the two main drivers of domestic demand, have shown negative growth.

Exports, which rose sharply and boosted GDP in the April-June period, also shrank this time to an increase of 0.5%. This is due to a decrease in spending by foreign visitors to Japan, which is counted as export data, compared to the previous quarter.

Exports are subject to a number of factors that are unstable, such as the slowdown of the Chinese economy. Japan is at a point where it might be able to come out of deflation and shift into strong growth, so shoring up domestic demand is indispensable to the nation’s economy.

Corporate earnings continue to be strong. In the fiscal year ending March 2024, final earnings of listed companies are expected to reach a record high for the third consecutive year, according to the government. But why is this not reflected in domestic economic growth?

It has been pointed out that many manufacturing companies have moved their production bases overseas and the profits earned from these bases are being used abroad rather than invested in the domestic economy.

Another factor may be that large corporations, which are concerned about the future, are building up their internal reserves. It is also possible that their positive business results have not spread to small and midsize enterprises.

The government needs to thoroughly analyze the structural reasons why improved corporate performance has not boosted the domestic economy and apply this analysis to its economic measures.

Companies that are performing well will be required to maximize the return of profits earned to their employees in next year’s shunto spring labor wage negotiations. They should also not neglect domestic investments in efforts for decarbonization and labor saving.

On the other hand, the slump in consumption is probably related to the public’s uncertainty about the future. Prime Minister Fumio Kishida has proposed an income tax cut, but this tax reduction has no clear reasoning behind it and will be implemented amid a critical fiscal situation, so it has not garnered public support.

Rather than resorting to pork-barrel measures, it is more important to present to the public a long-term strategy on how to develop Japan’s economy and restore the nation’s public finances.

(From The Yomiuri Shimbun, Nov. 17, 2023)