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Japan’s Economy: Monthly Outlook (June 2019)

No recovery for domestic demand without growth in overseas demand

Shunsuke Kobayashi

Yota Hirono

Summary

◆One of the pillars of Japan’s economic growth has been overseas demand, but it would be difficult to expect a recovery in this area for some time to come. This issue has been covered in our past reports. The shrinking of overseas demand’s contribution to growth is nothing new. It was already recording negative contribution rates to Japan’s economy back in FY2018. With overseas demand having turned in a negative direction, the overall growth rate managed to remain just below Japan’s potential growth rate only by virtue of relatively favorable domestic demand providing support.

◆However, in FY2019 we can no longer depend on an economic scenario that assumes domestic demand will prop up the Japanese economy when overseas demand is ailing. In short, growth in domestic demand during FY2018 was actually the result of favorable corporate business results in FY2017. In a sense you could call this “savings from the previous fiscal year.” In FY2017, both domestic and overseas demand was favorable, and corporate business results recorded a historic high. Earnings from that year were used as a resource for the making of improvements in employment, basic salaries, and bonuses. This provided support for improvements in household consumption. At the same time, demand for labor increased as did factory operating rates, and this encouraged an expansion in corporate capital expenditure in FY2018.

◆However, turning now to the present state of affairs, the only conclusion we can draw from the above is that it will be difficult to expect growth in domestic demand in FY2019. The slowdown in overseas demand and corporate business results in FY2018 has begun to take the edge off of momentum in household consumption and capital expenditure in FY2019. Looking at the factors making up employee compensation, the growth rate in the number of employees is expected to slow down, while the number of work hours per employee is expected to decline. A definite slowdown in the rate of growth for bonuses is also seen. Declining hopes for employment and income in the future will throw cold water on consumer confidence, bringing a strong possibility that propensity to consume will be inhibited. Then the planned increase in consumption tax in October will pour salt on the wound.

◆Household consumption is not the only component with dire prospects. The decline in factory operating rates as a result of unfavorable domestic and overseas demand, as well as inventory accumulation also casts a shadow over the expansion scenario for capital expenditure. Ignoring for a moment the question of time lag, it is ultimately difficult to expect a recovery in domestic demand in Japan as it stands now without a resurgence of growth in overseas demand. Our outlook for the future of Japan’s economy therefore remains unchanged, with the slowdown expected to continue for some time.

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