Export-guided GDP

Reflecting the expectation to Abenomics, the gross domestic products of Japan in the first quarter of this year showed 3.5% growth after its annual adjustment. Although exports and individual consumption contributed the positive outcome, capital investment did not follow. The focus of economic policy would be converging into consumption tax hike.

Followed by cheap yen against US dollar, exports marked 3.8% growth from the previous quarter, October-December in 2012. Carmakers symbolically led the growth. Individual consumption, which occupied about sixty percent of GDP, enjoyed 0.9% of surplus. Although the wage had no indication of growth, consumers were optimistic about future economy, causing them to expend. Cars sold more and contracts for buying apartment houses increased. More consumers tended to have dinner at expensive restaurants and watches and accessories were popular in the department stores. Income from higher value of stocks encouraged those consumptions.

However, capital investment declined as well as former consecutive four quarters. During the time of high valued Japanese yen, companies moved their productive facilities to overseas. Not having firm belief of long-term growth, managers were restrictive in building new assets in Japan. They saw no sign of expansion of internal demands. Negative tendency of capital investment proved that money earned by companies had not been spent enough to revitalize whole economy.

Economists are watching how this temporary enthusiasm leads to long-term growth. To encourage more pay for workers and less unemployment, growth policy of Abe administration, which consists of the third “arrow” of Abenomics, plays crucial role. Although PM Shinzo Abe already announced his intention of encouraging medical industries and investments on technologies, companies are still skeptical. Injection of money to economy without distributive mind of employers may cause social division between the haves and the have-nots.

Moreover, the government is taking advantage of GDP growth for the reason of raising consumption tax rate in April 2014 and October 2015. Consumption tax generally has bigger impact on the people with less income than on the well-to-do. Higher commodity price, higher tax and low wage may let the ordinary people embrace political frustration over the Abe’s mishandling of economy. Abe therefore needs to show more reliable perspectives on mid- or long-term economy before the election of the House of Councillors this summer.