"No sooner does the Japanese economy raise its head from the mat than it falls down again." So wrote one longtime Japan watcher last month on the news that, after zooming along at a real annualized rate of 3.9 percent in the first quarter, the GDP likely contracted during the second.
On Monday, the Japanese government reported that it did indeed fall 1.6 percent.
This is the year that the economic plan of Shinzo Abe, the prime minister, should be taking wing. The negative effect on consumer demand of a rise in the consumption tax in April 2014 — the economy tipped into recession afterward — is by now safely past. Meanwhile a drop in oil prices has been a boon for household budgets.
Yet the economy's performance has been underwhelming. The problems have been weak industrial production, thanks to a slowdown in exports to America and China, and anemic household consumption. In a recent report on Japan, economists at the IMF attributed some of consumers' reluctance to open their purses to their worries about how Japan's dire fiscal position — debt now stands at 246 percent of GDP — could affect their future income. Companies and consumers may also doubt whether Abenomics is here to stay.
The longer-term picture, though, looks more encouraging. Average real annualized GDP growth for the first half is likely to come in about 1.5 percent, which is relatively strong considering Japan's shrinking and aging population. Many economists are forecasting a further acceleration of growth in the second half, although this depends on a rebound in the global economy — hardly a forgone conclusion given the gloomy news from emerging markets.
Most encouragingly, GDP is on a steady upward trend in nominal terms. It was Japan's chronic failure to grow in nominal terms over the past two decades that set it apart from other developed countries.
Core consumer prices and the GDP deflator, another measure of inflation, have both started rising. And although the news on wages in June was disappointing — a 2.9 percent fall in real terms — they should soon rise as the labor market continues to tighten. Naohiko Baba of Goldman Sachs, a notable bear on Abenomics, expects real wage growth of 0.2 to 0.3 percent in the current fiscal year.
Adding to the momentum on pay, Abe outlined the largest increase in Japan's minimum wage since 2002 on July 29th, from ¥780 ($6.30) an hour to ¥798 an hour, a rise of 2.3 percent. (That will still leave it much lower than in many other rich countries.) The rise should help low-income earners most at risk from the Bank of Japan's quest to raise inflation.
The question now is whether firms and households can start driving faster growth. Japan's companies have slashed their debts and corporate profits are high. According to the Tankan survey, they consider business conditions to be as favorable now as they were during the most recent period of sustained growth, under former prime minister Junichiro Koizumi. For households, aggregate wage income — wages multiplied by employment — is growing.
Yet Abe's public support is now falling, because of unpopular defense legislation. There is little sign yet of any real challenge to his position, but he may in the future wield less clout.
The government's ability to demand that firms raise wages, as it did with some success this year, could wane, adds Baba. A poor second quarter will increase misgivings about Abe's economic plans. But it is hard to believe that the economy would be stronger without him.
Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.
