Japanese GDP grew at an annualized 2.4% in the first quarter, the fastest pace since a year ago. This is a sign of encouragement for Abenomics, but is it a sign of a true recovery?
The intention behind Prime Minister Shinzo Abe’s economic policies was that a weak yen and low interest rates would benefit the export-driven corporate sector, which would then translate those profits into wage increases and ultimately greater personal consumption and inflation. Unfortunately, this is not happening yet. Exports did grow by 2.4%, helping car and electronic manufacturers reap a 30% increase in profits, but corporations are still hoarding cash and building up inventory. (Inventory was one of the main contributors to the strong Q1 GDP number.)
Corporations also are complaining that higher oil prices, combined with the weak Japanese yen, are eating into their energy costs. The GDP numbers showed that imports actually grew more than exports, reflecting this heavy reliance on oil imports that Japan Inc. needs to keep on operating. (Since the Fukushima nuclear disaster, Japan has shut down all nuclear plants and now heavily relies on oil imports.)
Given this corporate conservatism, consumer spending has only showed a modest increase. In fact, most Japanese would probably tell you that their day-to-day costs are rising, while their wages remain the same. The Japanese import food and oil. So the weak yen means that food and energy costs have gone up. This increase in costs, coupled with the increased sales tax, are the factors working to suppress consumer spending.
So for the Japanese economy to turn around, a material wage increase is critical. While the government is urging wage increases, the corporate sector has been reluctant, and in April only certain large corporations were willing to give some workers one to three percent increases. While these moves were praised, they only translate to an additional $40 per month in income. With this kind of increase, we cannot expect second quarter GDP numbers to get any significant boost.
My View: The government has taken enough aggressive measures to jump start the economy, and now it’s the corporate sector that needs to give back – but it’s not doing that yet. In this unusual situation where market economics is not working, the government has called for wage increases and is contemplating fiscal policies that encourage this. It may take some time to change the 20 year deflationary culture, but I think Japan Inc. will eventually give back to workers, leading to further growth in the latter half of this year.
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