Photographer: Kazuhiro Nogi/AFP via Getty Images

Japan’s Economy Running Along on Half-Empty Fuel Tank

  • Stronger global demand, fiscal stimulus to fuel growth in 2017
  • Consumers yet to increase spending as wage gains remain tepid

Japan’s economy is cruising along, at least by its own recent standards, with real growth clocking in at 1 percent in 2016. It may have reached top speed.

Real gross domestic product expanded for a fourth consecutive quarter at the end of 2016, the best run in more than three years. A number of indicators are flashing green as global demand strengthens and last year’s fiscal stimulus kicks in. Exports rose in December for the first time in more than a year, and in the fourth quarter industrial production gained the most in nearly three years.

“Japan is in the best position it’s been in in four years,” said Izumi Devalier, head of Japan economics at Bank of America Merrill Lynch, who expects a 1.5 percent expansion in real GDP this year--nearly twice the potential growth rate of 0.8 percent. Her forecast ranks the second-highest among those compiled by Bloomberg, behind JPMorgan’s 1.6 percent. The median is for 1 percent growth.

The problem, though, is that near-term growth depends on external demand and fiscal stimulus, economists say, meaning the upside and growth horizon are limited. Japan also faces the risk that U.S. President Donald Trump’s protectionist rhetoric is soon transformed into policy that disrupts global trade, while the effects of last year’s stimulus are expected to fade by the second quarter of next year.

Domestic Consumption Needed

"Unless domestic private consumption picks up the economy is unlikely to gain traction," said Atsushi Takeda, an economist at Itochu Corp. in Tokyo.

A hit to exports would leave Japan’s beleaguered consumers to pick up the slack, something they’ve shown little inclination to do since a sales-tax increase in early 2014. Wages are rising only slightly, even with the tightest labor market in decades.

Most economists see wage gains picking up, but differ on how much.

Devalier sees a potential "inflection point" in Japan’s labor market this year, in which both demand and supply-side factors drive the economy to full employment, resulting in growth in nominal per worker wages of around 1.4 percent in the fiscal year beginning in April, and nearly 2 percent the following year. This could lead to "accelerating domestic demand," she said.

That is an optimistic view. Average monthly wages in Japan, adjusted for inflation, rose 0.7 percent in 2016 after falling for four years, according to preliminary data from the labor ministry. 

Wage gains will continue to be limited this year, according to Masamichi Adachi, Tokyo-based senior economist at JPMorgan Securities Japan and a former Bank of Japan official. “We are pessimistic,” he said. “We are not expecting higher wages to boost spending at all.”

Read more: Stingy pay raises pull the handbrake on Japan’s inflation drive

One encouraging sign is the growth in permanent employment. Japanese companies added 510,000 regular positions last year, the most since the government started collecting data in 2002, according to a preliminary report. That was the second year of gains following years of shrinking regular employment and growth in temporary, lower-paying positions that offer few benefits.

If Devalier’s outlook is accurate, Japan would see its fastest growth since 2013, when real GDP expanded 2 percent as Prime Minister Shinzo Abe implemented his economic revival strategy. Yet the bottom line for some economists remains a lack of structural reforms to raise Japan’s potential growth rate, or even sustain a cyclical upturn.

“Step back and you see the big structure hasn’t changed," Adachi said. "The government rejoices in a cyclical recovery in growth. When the economy shrinks in a shock, the government delivers another fiscal package and debt increases.”

— With assistance by Keiko Ujikane

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE