TOKYO -- Despite weakness in consumer spending and exports, solid employment and corporate earnings will keep the Japanese economy from buckling, panelists said in a roundtable discussion held here Monday by Nikkei Inc. and the Japan Center for Economic Research.
Some raised concerns that risks to the global economy, such as China's economic deceleration and a potential British exit from the European Union, could hit Japan.
Mitsui & Co. Chairman Masami Iijima, Nippon Life Insurance President Yoshinobu Tsutsui, Mizuho Research Institute Chief Economist Hajime Takata and JCER President Kazumasa Iwata participated in the roundtable. It was moderated by Tsuyoshi Hasebe, editor-in-chief at Nikkei's Tokyo headquarters. Excerpts from the discussion follow.
Q: January-March data released on May 18 showed real gross domestic product growing an annualized 1.7% on the quarter. How do you see the Japanese economy now and going forward?
Tsutsui: Growth was actually around 0.6% if you exclude the impact of the leap year. It's good that growth was positive, even if only slightly. Growth could turn negative in the April-June quarter with the drop-off after the leap year and the impact of the Kumamoto earthquakes.
Consumer spending, which is treading water now, will go back to recovering gradually from summer on. And wage growth has been high, staying in the 2% range for three straight years. A meaningful recovery in consumption will require a sustainable social insurance system. The over-saving we have, to the tune of tens of trillions of yen, stems from individuals' uncertainty about the future.
Iijima: The turmoil in global financial markets since the start of the year has thrown cold water on executives' appetite for investment. Export [growth] was barely positive in the January-March quarter. The trend is weak because of China's economic slowdown.
Consumer spending is still not recovering because disposable income isn't growing even with wage hikes, since social insurance premiums are rising and income tax deductions are shrinking. Another significant factor is that the subsidies for green cars and the eco-point system for appliances [giving consumers redeemable points for buying environmentally friendly items] that were introduced as stimulus measures after the financial crisis pushed purchases of durable goods forward.
Takata: The GDP [growth] in the January-March quarter just made up the losses from the slump in the October-December quarter. My stance that the economy has plateaued hasn't changed. Since Abenomics started, companies have kept upgrading earnings forecasts because the yen weakened beyond their assumed exchange rates. Now the yen is strengthening, and the tailwinds from overseas have become headwinds.
The U.S. has altered its exchange rate policy, and Japan is being forced to accept yen appreciation of around 10%. This is pushing down GDP by 0.3% and corporate profits by 4%. Although there won't be a sharp drop in capital spending, it's tough [for the government] to intervene in [currency] markets, so caution is needed.
Iwata: The bottom probably won't fall out of the domestic economy. It's supported by high corporate earnings and strong employment. But further strengthening of the yen would raise the risk of capital spending being put off or wage growth slowing.
Q: What do you think about crude oil price trends and their impact on the global economy?
Iijima: The fact that cheap oil boosts consumer spending in advanced countries is a plus, but the negatives have been increasing. In the U.S., [low oil prices] have dampened shale-oil-related capital spending, and there have even been layoffs. It's a brake on the U.S. economy.
Emerging countries are going down two different paths. India and the Philippines, which aren't affected by China's economic slowdown, are faring well. India has also benefited from low oil prices. Meanwhile, Russia and Brazil, where natural resources account for a high percentage of exports, are in dire straits. As for China, dealing with the central government's debt problems and the supply glut will take a little while. Economic growth will keep slowing at this gradual pace.
Tsutsui: I'm optimistic about China. It's true that many indicators are slowing or flat, and letting "zombie" companies fail and reducing overcapacity are necessary steps. The government is strong, so it'll keep a severe slowdown or a crash at bay at any cost. Such steps as infrastructure investment and further monetary policy measures will probably ensure a soft landing.
A British exit from the EU could lead to a stronger yen. If the U.K. leaves, its economy will be unstable for two or three years. I expect it to make the right choice in the end, so I see it staying. Greece needs funding for a July debt repayment, but with the EU dealing with so many problems, I think it'll come together on Greece. Turmoil will probably be avoided.
Takata: The U.S. had been expected to raise interest rates and pull the global economy along. But it's been in a tough spot lately, too. The world has no [growth] engine. It used to be the way of the global economy that countries that could afford to would provide support in tough times -- but Germany, which has the largest current-account balance, has turned a deaf ear. We've found no solutions to provide a boost.
Iwata: Advanced countries are in a period of extended stagnation. Focusing on fiscal stimulus at such events as [last week's] meeting of Group of Seven finance ministers and central bankers was a mistake. Ingenuity is needed to come up with growth strategies to boost potential growth.