Preliminary real gross domestic product (GDP) results for the July-September quarter fell 2.1% on an annualized basis. Domestic demand as manifested in consumer spending, capital investment, etc, also failed to gain momentum. This resulted in negative economic growth for the first time in three quarters since the October-December period of 2022.
Wage increases have not kept pace with the high cost of living. Unfortunately, this has brought a sense of stagnation to an economy that has been recovering from the damage caused by COVID-19.
Now the government, through a Cabinet decision, has approved an economic stimulus package that includes a flat-rate tax cut and other measures.
On November 15, Prime Minister Fumio Kishida exchanged views with representatives of the business community and labor organizations. In the meetings, held in the Prime Minister's office, he called for cooperation in raising wages in 2024 beyond the FY 2023 level.
However, private-sector initiatives remain the key. The question is whether companies can maintain momentum for wage increases and capital investment. We would like to ensure a virtuous economic cycle is created by driving domestic demand through proactive management.
Breaking the Negative Cycle
In the summer of 2023, for the first time in four years, there were no restrictions on activities imposed because of COVID-19. That was expected to increase consumption.
Even so, personal consumption did not perform well, falling 0.04% from the previous quarter. That was probably due to the increased tendency to economize and cut back on spending.
Real wages, which reflect fluctuations in prices, have been negative for 18 consecutive months through September. How positive real wages become is the key to boosting consumption.
Keidanren Weighs In
Keidanren chief Masakazu Tokura commented after the meetings between management and labor representatives at the Prime Minister's residence. In reference to the 2024 shunto (spring labor offensive), he said, "Enthusiasm is increasing for wage increases surpassing this year's level."
We want to ensure that this in fact materializes and leads to higher wages. Moreover, it should be not only for large companies but also for employees of small, medium, and micro businesses.
Swelling company earnings is certainly a positive factor. Exporters have been boosted by profits from overseas businesses due to the weak yen. Non-manufacturers have benefited from the recovery in inbound tourism (foreign visitors to Japan). On top of that, listed companies are expected to achieve record-high final profits for the current fiscal year.
An environment for sustainable wage increases should now be in place.
Capital Investment is an Essential Element
There is also a focus on capital investment, which declined 0.6% in the July-September period, to see whether it can be stimulated.
The Bank of Japan's September Tankan survey of short-term business sentiment projected capital investment plans for FY2023 would grow substantially for companies irrespective of size in all industries. However, such optimism has not been fully translated into actual investment.
If companies continue to hoard the profits they have earned, they will not be able to grow in the future. Furthermore, aggressive investment is essential to address the labor shortages that are emerging in many industries.
The outlook for external demand is also difficult to forecast due to the slowdown in the Chinese economy and other factors. But management should nevertheless recognize that it cannot continue to remain on the defensive.
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(Read the editorial in Japanese.)
Author: Editorial Board, The Sankei Shimbun