Japan’s GDP has grown, but can domestic demand remain strong?

The Yomiuri ShimbunDomestic demand buoyed the nation’s moderate growth, but its economic outlook warrants no optimism. Necessary measures should be explored by assessing the state of the economy carefully.

According to preliminary data, the nation’s gross domestic product expanded 0.4 percent in real terms in the April-June period from the previous quarter, growing at an annualized rate of 1.8 percent. This is the third consecutive quarter of positive growth.

Private consumption, which accounts for more than 50 percent of GDP, rose 0.6 percent. Lodging and other travel-related sectors saw brisk results thanks to the extended 10-day holiday for the changeover to a new era. Sales of automobiles and air conditioners also increased.

Exports fell 0.1 percent due to such factors as China’s economic slowdown. This indicates that growth in domestic demand, which includes consumption, surpassed the decline in external demand.

However, it is hard to say that private consumption is firm. In July, sales of soft drinks and beer products were sluggish due to bad weather. Summer bargain sales at department stores were struggling, while leisure facilities, including swimming pools, also took a hit in attracting customers.

The Cabinet Office’s consumer confidence index, which tracks livelihood outlooks over the next six months, fell for 10 consecutive months through July. Toward the planned consumption tax rate hike in October, consumers are increasingly wary. A repeat of the 2014 case, in which consumption stalled due to a tax rate increase, must be avoided.

As a countermeasure, the government plans to launch a point reward program for cashless payments at small and midsize businesses. Tax cuts will be implemented for automobile and housing purchases to cushion impacts from the tax rate hike. All possible steps should be taken to make the public aware of these measures.

BOJ must be agile

It is also concerning that summer bonuses at major companies fell about 3 percent this year, according to a tally by the Japan Business Federation (Keidanren). Many companies hold substantial internal reserves. To support consumption, it is desirable that companies give back to their employees as much as possible.

Capital investment, another pillar of domestic demand, showed upbeat growth of 1.5 percent in the April-June quarter. However, this also has many concerning aspects. Such factors as the decline in exports to China have dealt a blow to the performance of companies in the electronics, chemical and other manufacturing sectors.

Trade friction between the United States and China is intensifying. Financial markets have fluctuated, with the yen strengthening further. Toyota Motor Corp. changed its foreign exchange rate assumption and lowered its annual earnings forecast for the year ending in March 2020.

China’s economic slowdown and the stronger yen will become a double whammy for corporate earnings.

U.S. President Donald Trump expressed strong dissatisfaction with the stronger dollar on Twitter. As he believes the stronger dollar is working against exports by U.S. manufacturing companies, Trump urged the U.S. Federal Reserve Board to slash interest rates further as soon as possible.

If the United States implements additional interest rate cuts, the difference in interest rates between Japan and the United States will narrow, making it easier for the yen to strengthen. It is crucial for the Bank of Japan to pay attention to developments in the foreign exchange market and try to exercise the agile management of policy measures.

(From The Yomiuri Shimbun, Aug. 10, 2019)Speech


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