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Domestic Demand-Led Economic Growth and the Japanese Economy | Yoshihisa Kitai, Chief Economist Japan Technical Information Services Corporation [Date of Issue: 31/July/2012 No.0209-0850]

Date of Issue: 31/July/2012

Domestic Demand-Led Economic Growth and the Japanese Economy

Yoshihisa Kitai
Chief Economist
Japan Technical Information Services Corporation

Domestic demand-led economic growth is finally taking hold in Japan, but the budget deficit remains a source of concern, and achieving any real reduction of this will require restraining social security spending on the elderly.

The Japanese economy continues to expand smoothly on the back of personal consumption. For example, passenger vehicle sales reached an annually-adjusted 5.1 million units for early 2012, well up on the 4.2 million in 2010 and 3.5 million in 2011, in a trend buoyed by reinstatement of the eco-car subsidy scheme. As of August when the scheme ends, sales are expected to decline, but this drop should be relatively slight given that the eco-car subsidy budget was half the size that it was last time, the way in which 2011 replacement demand has moved forward into 2012, and the proactive sales strategies adopted by dealers. With special demand for digital terrestrial television peaking out, LCD TV sales have plunged from 21.1 million in 2011 to around an annually-adjusted eight million, but sales of white goods and mobile phones remain buoyant. Among white goods, protracted power shortages have boosted sales of appliances such as highly energy-efficient air conditioners and refrigerators, as well as washing machines and vacuum cleaners that feature new functions. Smart phone sales are soaring due to mobile phone replacement demand and second-phone demand. Sales for convenience stores as a whole have also remained robust, growing 5.9 percent year-on-year.

No. of new passenger vehicles registrations in Japan This strong personal consumption has been underpinned by an improvement in labor supply and demand which has prompted wages to bottom out at last and start to rise again. Looking at trends in the number of new job openings and new job applicants, since the former topped the latter in June 2011, the gap between the two has grown steadily, with new job openings reaching an annually-adjusted 9.77 million in May 2012 against 7.45 million job applicants. As recovery investment gets fully underway, the daily rate for construction workers has risen from around 15,000 yen to around 25,000 yen in the Tohoku area, and this is slowly beginning to spread out to neighboring regions. With a further increase in recovery investment as of mid-2012 a certainty, the shortage of construction workers will tighten supply and demand for workers in other industries, so wages will most likely begin to rise across the board.

No. of new job applicants add job openings in Japan Strong personal consumption has also prompted a surge in capital investment in retail and other non-manufacturing industries. Where in May 2011, the number of newly-opening convenience stores rose 681 on the previous year, this shot up in May 2012 to 1,747 stores. Notifications of the establishment of new large-scale retail stores also surged more than 20 percent from 579 in 2010 to an annually-adjusted 708 for January-May 2012. Mobile phone companies are coping with the increased data transmission volume accompanying spiking smart phone sales by acquiring new bandwidth and boosting their base station investment. In the manufacturing companies, all the maintenance and renewal investment that had been shelved is now going through, and according to the Bank of Japan’s June Tankan survey, manufacturing majors plan to boost their capital investment by 12.4 percent in FY2012. Housing investment is on the rise due to factors such as more recovery investment, and housing starts bottomed out at an annually-adjusted 749,000 in September 2011 to hit 903,000 in May 2012. On the other hand, with the yen still holding strong and the recovery of the global economy remaining slow, exports have been a little sluggish. Many Japanese manufacturers also plan to deal with offshore demand growth in the coming years by expanding local production, so exports seem unlikely to grow even over the medium term.

The above trends make it increasingly certain that the Japanese economy will grow around three percent in FY2012 on the strength of personal consumption and other domestic demand, while the likelihood is also rising that FY2013 too will sustain domestic demand-led growth of around two percent. Progress has also finally been seen on the budget deficit, the greatest issue for the Japanese economy over the medium term. On 23 June, the Lower House passed bills for integrated tax and social security reforms. These bills should be passed by the Upper House as well in August, making a consumption hike from eight to 10 percent in September 2015 almost inevitable. The FY2012 budget deficit is expected to weigh in at around 30 trillion yen, but with total tax revenues rising by 10 trillion yen thanks to the consumption tax hike, as well a natural increase in corporate tax and income tax revenue of 10 trillion yen, even if spending goes up, the budget deficit should fall to 15 trillion yen, or around three percent of nominal GDP, in FY2015. However, because the number of elderly will continue to rise rapidly, social security spending will also keep growing, so restoring Japan’s public finances to health will require a committed drive to restrain that spending. At a rough estimate, the combined spending of central and local governments grew from 75 trillion yen in FY2000 to 105 trillion in FY2011. As more of the baby-boomer generation reach the age of 65, the 65-and-over age bracket is expected to grow at an annually-adjusted two to three percent for the next five years, placing extremely strong natural growth pressure on the social security budget. If the government does not constrain per capita spending on the elderly, the effect of raising the consumption tax to 10 percent will be lost very rapidly. Both Europe and the US plan to raise the start date for receiving a public pension, and reviewing pension payment standards is also being debated. While it will no doubt be difficult to garner public consensus, Japan’s social security spending on the elderly too, including reining in spending on medical care for the elderly, will have to be reviewed if we are to bring Japan’s public finances in for a soft landing.

Japan's social security spending (original article : Japanese)

(For the Japanese version of this article)

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