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Japan's record expansion produces no consumption boom

Recovery buoyed by a weak yen and public spending

Shoppers and tourists seen in Tokyo's Marunouchi business district on a weekend. (Photo by Koji Uema)

TOKYO -- Japan's economic recovery has stretched to a record 74 months, yet consumers have remained reluctant to spend over the past six years, squeezed by a rebound as mild as it has been long.

The recovery dating to December 2012 was tabbed as likely the country's longest postwar streak of economic expansion in the Cabinet Office's monthly economic report for January released on Jan. 29.

Yet annual economic growth during this streak averages just 1.2%. By comparison, Japan set an 11.5% pace for its postwar surge between 1965 and 1970, along with a 5.3% rate amid the stock and real estate bubble that began in 1986 and burst in 1991. Even the 73-month recovery between 2002 and 2008 notched 1.6% annual growth.

"We want to get the economy going faster so that we feel the economic recovery more strongly," Toshimitsu Motegi, the economic and fiscal policy minister, said on Jan. 29 in answering a question about the scale of the current rebound.

The latest recovery coincides with the present tenure of Prime Minister Shinzo Abe, who also returned to power in December 2012. The economy received a boost from yen depreciation that resulted from the Bank of Japan's unprecedented level of monetary easing.

Previously trading around 90 to the dollar, the Japanese currency began weakening rapidly. The yen rate has been stable around 110 over the past two years. This softer yen fueled exports, with outbound shipments soaring 31% between the fourth quarter of 2017 and the third quarter of 2018.

The economy also benefited from stimulus spending by the Abe government, with a series of measures that began in January 2013. Even public works spending, which was trimmed during the previous recovery phase in the 2000s, increased 6% between fiscal 2012 and fiscal 2017.

Although the 2014 hike in the consumption tax brought in more revenue, government spending continued to increase. The value of outstanding government bonds is projected to total 897 trillion yen ($8.2 trillion) at the end of fiscal 2019, up 192 trillion yen from seven years earlier.

The economic recovery helped revitalize corporate earnings. Japanese companies across the board -- excluding financial service providers and insurers -- earned an aggregate pretax profit of 83.6 trillion yen for fiscal 2017, an all-time high.

The country's aging society left businesses with a shrinking workforce, prompting them to begin proactively hiring while also investing heavily for automation and efficiency improvements.

Japan's labor market has reached a point of full employment, meaning people who wish to work can find a job. The competition to hire workers has driven employers across industries to raise wages.

Yet personal consumption -- which accounts for nearly 60% of Japan's gross domestic product -- edged up a mere 2% over the past six years. Rising taxes for social security and other programs have limited disposable income.

A typical household with two or more wage earners paid 25.7% of work income as social security and other taxes in 2017, up from 23.7% in 2012, according to an analysis by Shungo Koreeda at the Daiwa Institute of Research.

Another factor may be to blame. Japan's workforce in the health care and nursing industry totaled 8.58 million as of November, growing more than 20% from 2012, Ministry of Internal Affairs data shows. However, pay for nursing staff tends to be lower than in industries such as tech and finance.

So "even though low-wage jobs have increased, this has not contributed significantly to lifting overall household income," said Takuya Hoshino of the Dai-ichi Life Research Institute.

The export-driven recovery now faces storm clouds. The cabinet's January report downgraded Japan's assessment of the global economy for the first time in 35 months, citing risks like the trade dispute between China and the U.S. and a milder pace of recovery in the eurozone.

Meanwhile, the rock-bottom interest rates in Japan have eroded profits at financial institutions. The central bank is unlikely to take further bold easing steps, making the yen susceptible to appreciation pressure if the world economy starts to slow.

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