Japan: An elusive recovery

Japan: An elusive recovery

Japan: An elusive recovery

Global Economic Outlook Q4 2012

External headwinds, stagnant consumer spending, and declining real wages are hindering Japan’s economic recovery. Besides, a political dispute with China is affecting industry’s economy.

Japan’s economy has been mostly sluggish for some time, despite the increased government spending on reconstruction following last year’s earthquake and tsunami. Although there have been periodic bursts of economic activity, such as the 5.5 percent growth rate in the first quarter of this year, growth has mostly been disappointing. For example, the Japanese government reported that the economy grew at an annual rate of only 0.7 percent in the second quarter. This was revised down from the original growth estimate of 1.4 percent in the second quarter. The slow growth was largely due to weak private investment as well as weaker-than-expected public spending on reconstruction.

The government also reported that the compensation of workers continues to decline, with total wages to workers in Japan in the second quarter only marginally higher than in 1991—21 years ago. This means, of course, that unit labor costs are declining, thereby improving the competitiveness of Japanese products. Yet that improvement is largely offset by the negative impact of a highly valued Japanese yen. On the other hand, declining wages contribute to declining purchasing power and stagnant consumer spending. This wage decline also contributes to deflation, which remains a serious problem in Japan.

This begs the question of whether the central bank will act according to its goals. The Bank of Japan has set a formal inflation target of 1.0 percent, yet prices continue to decline despite a more aggressive monetary policy. For the past year, the Bank of Japan has engaged in quantitative easing: the bank purchases assets such as government bonds in order to inject liquidity into the economy. The idea is to boost the money supply, thereby creating some inflation. Other goals include keeping market interest rates low and putting downward pressure on the value of the yen. Yet the policy, which involved purchases of 45 trillion yen worth of assets (roughly US$570 billion), has yet to result in any inflation. Perhaps that is because it is not very aggressive compared to what has been done by the US Federal Reserve or the Bank of England. Consequently, on September 18, 2012, the Bank of Japan boosted its program of quantitative easing by 10 trillion yen, demonstrating that the bank is concerned about continued deflation and a high-valued yen. It also means that the bank recognizes that the Federal Reserve’s new third round of quantitative easing is likely to put downward pressure on the US dollar and, therefore, upward pressure on the yen. Yet again, the question of whether this will be sufficient must be asked.

Japan’s major automotive companies report that, in September, sales of Japanese brand vehicles in China dropped sharply.

By October, with Japanese government officials urging a more accommodative policy, the Bank of Japan chose to leave its asset purchasing program unchanged at 55 trillion yen (US$700 billion). In addition, the Bank of Japan downgraded its assessment of the outlook for growth and inflation, saying, “Economic activity is leveling off.” Unusually, the economy minister attended the latest meeting of the bank’s policymaking committee. He said that he wanted to express his “sense of crisis” to the bank. Clearly he failed to move the bank toward a more aggressive stance. Still, some observers now believe that the bank will boost the quantitative-easing policy at its next meeting, especially if it continues to downgrade its assessment of inflation.


Meanwhile, some indicators suggest that the health of the Japanese economy is not improving. The well-known Tankan survey, which measures confidence among manufacturers, declined in September. This was the fourth consecutive decline in this quarterly measure. In addition, exports fell in August for the third consecutive month, declining by 5.8 percent year over year, and imports fell 5.4 percent due to a recent slide in oil prices, marking the sharpest decline in nearly three years. Industrial production fell in July, and purchasing managers’ indices for both manufacturing and services were down in August. On the other hand, new orders for machinery rose 4.6 percent from June to July. This unexpected increase could bode well for capital spending in the months ahead.

Just at a time when the Japanese economy hardly needs bad news, the political dispute between Japan and China over a group of islands is starting to have a real impact on the economy. Japan’s major automotive companies report that, in September, sales of Japanese brand vehicles in China dropped sharply. While the vehicles are mostly assembled in China, many of their parts are made in Japan. Consequently, if this dispute results in a sustained decline in Chinese demand for Japanese products, it could have real consequences for Japan’s already troubled industrial sector.


Ira Kalish

Ira Kalish is director of global economics, Deloitte Research, Deloitte Services LP.

Japan: An elusive recovery
Cover Image by Maria Corte Maidagan
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