TOKYO -- Japan's economic recovery has become its third-longest since World War II, driven by higher corporate profits and public works spending. Yet weak wage growth has made improvements tepid and hard to detect.
The recovery likely continued through March, according to Yoshiki Shinke at the Dai-ichi Life Research Institute, reflecting a widely held view among economists. The February reading of the Cabinet Office's index of business conditions, due out Friday, is expected to show continued improvement.
March would mark the 52nd month of recovery since Shinzo Abe returned to the prime minister's office in December 2012, ushering in the pro-growth policy dubbed Abenomics. That streak edges out the 51-month expansion during Japan's asset-price bubble from 1986 to 1991. Should it last through September, it will surpass the 57-month recovery seen in the 1965-1970 "Izanagi boom" as well.
Growth faltered after Japan raised the consumption tax in April 2014. But "factors such as the depth and length of the dip, taken comprehensively, do not add up to a recession," says Yuji Shimanaka of Mitsubishi UFJ Morgan Stanley Securities, a member of the cabinet research committee that determines the length of economic recoveries.
The U.S. has enjoyed a long-term period of expansion since July 2009, and relative economic stability overseas has supported Japan's own upswing.
More recently, Japanese industrial output and exports have picked up, thanks to U.S. and Chinese demand. Corporate earnings, which have benefited from a weak yen under Abenomics, remain firm. "Barring something like a global financial shock, the recovery should continue through 2018," Dai-ichi Life's Shinke says.
That said, the pace so far has been lukewarm. Japan's longest postwar recovery, which lasted for much of the 2000s, saw exports grow by four-fifths. In the current upturn, they have increased just one-fifth. Capital investment has gained just 10%, half the rise in the 2000s period. Wage improvement has been weak despite robust hiring, and individual consumption seems unable to break out of its flat growth.
Public works investment has been the key feature of the Abenomics recovery, rising nearly 10% throughout the period, between reconstruction budgets for the March 2011 East Japan earthquake and tsunami and repeated stimulus packages. That contrasts with the 30% cut in public works spending under then-Prime Minister Junichiro Koizumi during the 2000s recovery.
Meanwhile, the economy's potential growth rate has declined, showing less capacity for medium-term improvement. The Cabinet Office estimates it at 0.8% for 2016. A shrinking population constrains the size of the workforce, making businesses wary of investing in facilities at home. This robs the expansion of momentum.