EDITORIAL | To Boost GDP, Companies Must Invest in Equipment, Employees

Preliminary data for real gross domestic product (GDP) growth in the January-March quarter showed a decline of 2.0% annually. This reflected the ongoing weakness in personal consumption. 

It is the first instance of negative growth in two quarters. Granted, the Japanese economy is still recovering from the COVID-19 pandemic. However, it will not be able to escape its current seesawing pattern of advancing, then regressing, unless consumption picks up steam. After all, consumption makes up a large share of GDP. 

We stand at a turning point and it remains to be seen whether the Japanese economy will be able to finally attain sustainable growth. Continued vigilance is essential. 

Focus on Economic Concerns

The sharp depreciation in the value of the yen and the resulting rise in import prices have negatively impacted household budgets and business activity alike. Meanwhile, the sizable wage hikes agreed to during the spring labor offensive (shunto) should manifest themselves in earnest over time. Whether the wage hikes can keep up with the rise in prices will be key to a recovery in consumption. 

A strong economic recovery led by private sector demand resulting from proactive corporate management will be critical. Furthermore, there is a need to invest in equipment and employees and ensure wages increase at small- and medium-sized enterprises. Efforts need to be stepped up regarding both. 

Personal consumption in the January-March quarter was down 0.7% from the previous quarter. The suspension of production at some factories was a special factor contributing to declining new car purchases. This was caused by the safety certification fraud scandal which hit the Toyota Motor Group. Also, real wages had been trending negative for 24 straight months through March due to the prevailing high prices. The resulting decline in purchasing power among consumers was another big factor. 

Besides the wage increases, fixed-rate income and residence tax cuts are scheduled to take effect in June. If real wages were to turn positive, that would represent a major change in the overall trend. However, the recent weak yen and high crude oil prices may reduce the effect of improving incomes. 

Taking a Long-term View

We would like to see companies become more proactive in capital investment, which was down 0.8% during the January-March quarter. The financial results for listed companies for the fiscal year ending March 31, 2024, show that several companies have significantly improved their earnings thanks to the tailwind provided by the weaker yen. Those include manufacturers earning money overseas. In addition, many Japanese companies stand to benefit from the dramatic rise in inbound tourism bringing foreign visitors to Japan. 

Investments designed to increase productivity and develop growth areas contribute to stabilizing management bases over the medium- to long term. Companies must increase their earning power through such efforts to create a virtuous economic cycle. 

Regarding the recent depreciation of the yen, there has been considerable speculation about the timing of interest rate hikes by the Bank of Japan. Such measures could result in a strengthening of the value of the yen. However, raising interest too quickly, when the economy still shows signs of weakness, could stifle economic recovery. Prudent judgment will be required to achieve an appropriate monetary policy for the economy at this critical junction. 

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(Read the editorial in Japanese.)

Author: Editorial Board, The Sankei Shimbun