The Journal The Authority on Global Business in Japan

Cabinet Office
Despite GDP growth, efforts focus on strengthening domestic demand

GDP data for the last quarter of 2016 was released by the Cabinet Office on February 13. Disregarding prices for commodities, growth of 0.2% was realized over the previous quarter. If the rate can be sustained for the coming year, an additional 1% is hypothesized, giving four straight quarters of growth. Realizing these figures depends on exports, including motor vehicle exports to the United States, and individual consumption is likely to decline very slightly. The emerging picture points to continued weak domestic demand, and the mood has become uncertain due to prospective moves to adopt protectionist measures by the administration of US President Donald Trump. Japan, therefore, urgently needs to shed its economic model of dependence on exports and boost domestic demand.

“How will the Japan–US relationship change? We have to concentrate on its effect on Japan,” said Nobuteru Ishihara, Minister for Economic Revitalization, Total Reform of Social Security and Tax, and Economic and Fiscal Policy, at a press conference following the release of the data.

Exports, when viewed by sector, realized a gain of 2.6% in the year’s last two quarters, with automobile exports to the United States and electronic components for smartphones to China showing particularly strong demand. Individual consumption, which accounts for some 60% of GDP, showed an overall decline of 0.01%. The sharp rise in the price of vegetables due to inclement weather exacerbated resistance to spending, and demand for apparel was also weak. After two negative quarters, investments in plant and equipment rose by 0.9% in the final quarter. Japan continues to rely on exports, and market-watchers see the main risk factor for the nation’s economy to be the trade policies of the Trump administration.

Should the United States make strong demands to rectify the trade imbalance and yen–dollar exchange rate, there are concerns that the shift by Japanese companies to manufacturing in the United States—and the rapid appreciation of the yen—will negatively affect Japanese exports.

Ministry of Finance
Frantic damage control underway following Trump appointments

Criticism by US President Donald Trump of undervalued currencies has targeted not only China, but also Japan and Germany. The matter has gone so far as to single out present fiscal policies by the Bank of Japan, and the Ministry of Finance has taken desperate steps to provide an explanation. Prior to the summit between Trump and Prime Minister Shinzo Abe on February 10, a contingent led by Vice Minister of Finance for International Affairs Masatsugu Asakawa traveled to the United States to meet with their US counterparts.

On January 31, Trump met with top executives of major pharmaceutical companies, at which time he accused Japan of pursuing a fiscal policy of “manipulating exchange rates,” leading to devaluation of the yen.

Up to that point, according to an official at the Ministry of Finance, Trump’s remarks addressing the overvalued dollar had mainly been directed at China. After Japan was also targeted, Asakawa promptly engaged in damage control, asserting that “Japan’s fiscal policies are aimed at halting deflation in the domestic economy, and we have not intervened in foreign exchange markets.”

The Bank of Japan is not the only institution whose deregulation of financial markets has led to currency devaluation. Initially, the US Federal Reserve engaged in deregulation following the 2008 financial crisis, causing the value of the US dollar to decline. It is generally recognized, however, that such fiscal moves were aimed at rescuing the domestic economy.

The Trump administration, which takes a stance of obtaining optimal advantage for its own country—irrespective of international agreements—has the ministry on pins and needles.
Asakawa remarked, “Up to now, a firm basis has existed for debating various issues at the G7 and G20 conferences.”

Henceforth, US Secretary of the Treasury Steven Mnuchin will become Asakawa’s counterpart. “He’s an honest person, but doesn’t appear to have much influence in the administration,” is the word on the street.

Keizaikai magazine