GDP data good, but uncertainties growing

The Yomiuri Shimbun

The domestic economy seems to remain strong. However, not everything may be rosy for Japan's economic prospects as concerns grow over the possibility of a decelerating world economy.

The gross domestic product rose 3.7 percent on an annual basis in the October-December period, marking positive growth for the second consecutive quarter.

The newly released figures are significantly higher than analysts' predictions. Players on the country's stock markets also responded to the Cabinet Office's preliminary GDP report favorably, bringing about a significant surge in stock prices.

The high growth rate is attributable mainly to an increase in companies' capital investment backed by buoyant exports to other Asian countries and the Middle East. The economy has also begun to shake off the lingering negative impact of a housing investment slump that resulted from the enforcement of the revised Building Standards Law last summer. The report proves that economic expansion led by the corporate sector was firm--at least until the end of last year.

Dark clouds ahead?

But uncertainties are growing over how long strong exports and corresponding brisk corporate activities will last.

In the United States, the subprime mortgage fiasco is affecting its economy, triggering fears that it could fall into recession. If that happens, there is no way to avoid a negative impact on the economies of emerging nations in Asia and other regions, and Japan's exports to those nations would become sluggish.

Escalating raw material prices and a recent appreciation in the yen also are beginning to cast a shadow on corporate performances in Japan.

Although companies listed on the First Section of the Tokyo Stock Exchange on the whole are predicted to post the highest recurring profits ever for the fifth straight year in their earnings reports for the business year ending in March, a growing number of firms have begun revising profit predictions downward. If companies become cautious about the future outlook on exports and business performances, a slowdown of their investment in plants and equipment will be unavoidable.

On the other hand, personal consumption, which is described as one of the two wheels for domestic demand--capital investment is the other--has been in the doldrums because of slack wage growth. There is a fear that price increases in food and petroleum-related products, including kerosene, will dampen already weak consumer spending.

Diet impasse bad for market

Though GDP growth for the quarter was higher than expected, it does not mean we should worry less about a potential economic downturn. Rather, we need to be increasingly vigilant to ensure the nation can sustain its economic recovery.

Financial market instability sparked by the U.S. subprime mortgage crisis continues. If a steep decline in stock prices does not let up, fears could accelerate over a stalled economic recovery. Market stability is vital.

Though opposition bloc control of the House of Councillors makes it difficult to proceed with Diet deliberations smoothly, it is vital to get Diet approval of the fiscal 2008 budget and the passage into law of tax system-related bills within the current fiscal year, which ends March 31.

If debate over the provisional gasoline tax rate gets tangled up in further bickering and Diet approval of next fiscal year's budget and passage of related bills are delayed, this will impact people's lives and, as a result, further destabilize markets.

Maintaining economic recovery requires that each of these destabilizing factors be nipped in the bud, one by one.

(From The Yomiuri Shimbun, Feb. 15, 2008)