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The Japanese economy is slowly recovering, but the risks ahead are increasing. The government must urgently intensify its specific measures to promote wage increases that outpace higher prices and to encourage active investments.
The preliminary real gross domestic product for the July-September 2024 quarter increased by an annualized 0.9% from the previous quarter. This was the second consecutive quarter of expansion, but the rate of increase slowed from 2.2% in the April-June period.
Private consumption, which accounts for the majority of GDP, grew 0.9% from the previous quarter. Corporate capital investment, another pillar of domestic demand, declined 0.2%. The fact that positive growth was maintained overall was largely due to consumption remaining firm.
However, it is worrisome that there are many temporary factors.
The recovery in new car sales, in some respects, is a reaction to the decline that was caused by cases of automobile certification fraud. The increase in spending on food and beverages was due to hoarding caused by the release of Nankai Trough Earthquake Extra Information warnings and typhoons. Dining out and stays at accommodations facilities were sluggish, and the public’s stronger tendency to be thrifty is deep-rooted.
During this period, the income conditions improved significantly due to the impact of a flat tax cut of ¥40,000 per capita annually and the resumption of subsidies on electricity and gas fees. However, it is hard to say that consumption has been boosted as much as expected.
The government is considering providing benefits to low-income households and resuming subsidies on electricity and gas fees as part of an economic stimulus package to be compiled as early as at the end of the month. Such lavish handout measures are unlikely to boost the growth potential of the Japanese economy.
Japan is at a critical juncture to shift to a “growth-oriented economy” led by higher wages and investment. Under such circumstances, there are increasing causes for concern about the future, and preparations must be hastened in that regard.
Exports to China, whose economy has been stagnant, were sluggish in the latest preliminary GDP report, and growth shrank to 0.4% from 2.6% in the previous quarter. With U.S. President-elect Donald Trump insisting that high tariffs be imposed, exports could suffer a further blow in the future.
It is essential to expand domestic demand, rather than relying solely on foreign demand. However, the recent depreciation of the yen and appreciation of the dollar has contributed to high prices, placing a burden on household finances.
A virtuous cycle of investments and wage increases that overcome high prices will not be realized if companies hold more than ¥600 trillion in internal reserves instead of making use of the funds. It is hoped that large corporations will lead the way in raising wages and extend the benefits to small and midsize enterprises as well.
The hope is that the government will devise further measures, such as preferential taxation for companies that implement higher wages. There are many important areas to be addressed, including digitalization, decarbonization and labor-saving efforts to solve the shortage of workers. It is also vital to encourage investment in technological innovation.
