The economic recovery was confirmed once again to be at a standstill. That the growth rate dropped so easily below zero due to weather and other factors is proof of the national economy's weak foundations.
To ensure an exit from deflation, strategies to increase growth must be steadily carried out. The gross domestic product for the October to December period last year declined by 0.4 per cent in real terms from the previous quarter for an annualised contraction of 1.4 per cent, according to preliminary figures released by the Cabinet Office. The negative growth was the first in two quarters.
The primary cause of the shrinkage was a slump in personal consumption. Sales of winter clothes and other goods fell due to the unseasonably warm weather. Exports declined by 0.9 per cent due to slumping business in emerging economies. Capital investments, on the other hand, rose 1.4 per cent, increasing for the second straight quarter.
It is encouraging to see that we are finally witnessing the emergence of a recovery reflecting brisk corporate performances and such demand as that originating from making changes to computer systems to be compatible with the recently introduced My Number system (for individual social security and tax numbers).
During a House of Representatives Budget Committee session, Prime Minister Shinzo Abe said: "Economic fundamentals are firm as reflected by the record-high corporate earnings and the increase in employment."
He therefore indicated that the drop in the growth rate was temporary. The prime minister's business assessment is reasonable, but the drop in consumption despite the increase of wages for employees indicates the deep-seated trend for savings among households. Whether pay raises can be achieved as a result of the annual spring wage negotiations is key to expelling the deflationary mind-set for household budgets. Economic Revitalisation Minister Nobuteru Ishihara said his ministry "will carry out various policies to realise a robust rise in wages."
It is important to broaden the range of wage hikes centering on an increase in base salaries, thereby helping accelerate once again a virtuous economic cycle. Of concern in this respect is what impact will be caused by such market turmoil as the rapid strengthening of the yen and falling stock prices. The exchange rate assumed by businesses at present is around ¥118 to the dollar. If the yen continues to strengthen, it will further adversely affect the business performances of export-related companies and others.
The slackening of growth in corporate achievements will dampen the momentum for carrying out wage hikes and may lead to delayed investments in plants and equipment. The Group of 20 major economies will hold a meeting of their financial ministers and central bank governors in Shanghai late this month. The government and the Bank of Japan must closely co-operate on policies to work toward the stabilisation of financial markets around the world.
They must come up with concrete steps to prevent and mitigate the flight of capital back to developed countries, a factor contributing to the turmoil in China and other emerging economies. The government will formulate a plan this spring for what it calls "a society with all 100 million-plus people dynamically engaged," which is aimed at establishing a virtuous cycle for growth and distribution. In co-operation with business circles, the government must come up with deregulation measures that will help spur investments and support the fostering of personnel in such new fields as medicine and agriculture.
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The Yomiuri Shimbun is a member of The Straits Times media partner Asia News Network, a grouping of 22 newspapers seeking to promote coverage of Asian affairs.
