May 19, 2017 6:20 am JST

Japan's GDP growth masks stubborn deflation woes

Consumption rebounds but wages remain flat

The Japanese economy remains dogged by persistent deflation.

TOKYO -- Underneath Japan's extended economic expansion is a fragile bounce in private consumption not underpinned by significant wage gains, a fact that bodes poorly for the nation's yearslong struggle to conquer deflation.

First the good news

Real gross domestic product grew an annualized 2.2% on the quarter in the January-March period, marking the fifth straight quarter of expansion. That rivals the six-quarter run to April-June 2006, the longest streak in the postwar era.

This performance comes despite the potential growth rate hovering near zero, a symptom mainly of Japan's declining population.

Exports accounted for 1.4% of economic growth, while consumption made up the other 0.8%. Shipments of chipmaking devices and other equipment were strong amid rising demand for technology for smartphones and other devices. Chinese smartphone manufacturers are upgrading features by adding more chips, providing a lift to Japanese component makers and their global growth ambitions.

Failing on four key indicators

However, consumer spending figures appear to be more of a fluke. Last summer's typhoons caused fresh-food prices to spike, fueling thriftiness. But purse strings loosened as the impact faded.

Bigger household budgets are essential for a sustained recovery in consumption. But nominal worker compensation, which had climbed by over 2% on the year in previous quarters, inched up only 0.8% the first three months of this year.

Prime Minister Shinzo Abe's government focuses on four indicators to gauge how well the fight against deflation is progressing. So far, each one is far from spectacular.

The general consumer price index may be in positive territory, but only barely. Unit labor costs, which closely track wages, slipped for the first time in six quarters due to employers' apparent reluctance to raise pay.  

The GDP deflator -- a comprehensive indicator of price levels -- declined 0.8%, its biggest drop since the first quarter of 2013. Although the cost of importing crude oil and similar commodities has jumped, that has not translated to domestic prices.

The GDP gap, which shows the degree of tightness in national supply and demand, is evidently still indicating insufficient demand as a consequence of muted spending.

"We haven't made a resounding escape from deflation," said Nobuteru Ishihara, minister of economic and fiscal policy.

Will wage hikes be enough?

Many private-sector economists believe the four yardsticks won't be unified in showing Japan has beat back deflation until some time between fiscal 2018 and 2019. But "wage hikes, which support a recovery in consumption, need to be accelerated," said Yoshimasa Maruyama at SMBC Nikko Securities.

Other experts doubt that wage increases alone will lift the country out of deflation. "It is essential to ease future concerns by reforming the social insurance program," said Yoko Takeda of the Mitsubishi Research Institute.

"Structural problems like the declining demand accompanying the shrinking, graying population are at the root of deflation, so I can't possibly see when we will escape it," declared Yasunari Ueno at Mizuho Securities.

The weak readings are also casting a shadow on the Bank of Japan's exit plan from its ultraloose monetary policy. The central bank has adopted a 2% inflation goal, but it remains persistently out of reach. The consumer price index minus fresh foods is expected to grow by only 1.03% in the first quarter of 2019, according to the average projection by private economists in a May survey by the Japan Center for Economic Research.

(Nikkei)

Mitsubishi Research Institute, Inc.

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