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Supply Chain Risk

Prevent a slide into recession

The annualized 0.2 percent growth in Japan’s gross domestic product during the July-September period — much slower than the 1.8 percent rise in the preceding quarter — indicates that the economy, billed by the government to still be in its longest-ever postwar boom cycle, is at a crossroads. Since the October-December quarter is widely expected to see a drop in GDP due to the impact of the consumption tax hike, the coming months will likely test the economy’s resilience.

Prime Minister Shinzo Abe has instructed his administration to compile a stimulus package to the tune of trillions of yen, partly to finance reconstruction in areas ravaged by the recent series of typhoons and beef up disaster-prevention infrastructure, and partly to shore up the economy in view of the growing downside risks.

Investing in projects to make the nation more resilient to natural disasters is essential, given that major disasters caused by extreme weather are becoming more frequent and more devastating, as demonstrated by the extensive damage from recent typhoons. Along with near-term steps to shore up the slowing economy, the stimulus package should feature measures that contribute to structural reforms to pave the way for sustained growth led by more brisk domestic demand — given that a full-scale recovery in export demand does not appear likely anytime soon.

The economy barely managed to expand — for the fourth straight quarter — after moves by consumers to buy home electronics products, daily commodities or cars before the Oct. 1 consumption tax hike to 10 percent pushed up private consumption by 0.4 percent from the previous quarter. But the last-minute surge in purchases was much weaker than before the last tax hike in April 2014, when consumer spending rose 2 percent in the three preceding months. The consumer appetite to spend is also believed to have been subdued after the 10-day holiday marking the transition from the Heisei to the Reiwa eras boosted consumption during the April-June quarter.

The annualized 7.3 percent GDP decline in April-June 2014 — right after the consumption tax was raised from 5 percent to 8 percent — reflected a sharp fallback in consumer spending and threatened to derail a still-nascent recovery. That experience prompted Abe later to twice postpone the tax hike to 10 percent for four years. This time, the fallback in consumption is not expected to be that large, given that the tax hike was not that steep and Abe’s government has taken various steps to ease its impact. However, there are views that the subdued last-minute purchases ahead of the October tax hike are yet another sign of underlying weakness in private consumption.

Various indicators point to a possible downturn in the economy. A key composite index of economic indicators in September, released this month, improved from the previous month, but the Cabinet Office kept unchanged its assessment of the data that the economy is “worsening.” In its monthly economic report, the government is sticking to its official position that the economy continues to be on a moderate recovery. However, the latest tankan quarterly survey by the Bank of Japan showed that business sentiment among large manufacturers declined for the third quarter in a row to the lowest level since June 2013.

Business sentiment has been dampened by a slowdown in exports caused by slowing global growth stemming from the protracted bitter trade dispute between the United States and China. Exports fell 0.7 percent during the July-September period. The fall in spending by inbound tourists, including those from South Korea, whose numbers have plummeted amid the severe strain in Tokyo-Seoul ties, also contributed to the decline in export figures.

Big companies that posted record profits in recent years — on the strength of brisk overseas demand and the weak yen under Abenomics — are seeing a sharp slowdown in earnings. Combined net profits at companies listed on the first section of the Tokyo Stock Exchange in the April-September period are estimated to be roughly 10 percent lower than in the same period last year — the first year-on-year fall in three years. The decline is much steeper — nearly 20 percent — among manufacturers, which have been hit hard by falling exports to China due to the slowdown in the Chinese economy amid the trade war with the United States.

Sluggish corporate profits will make more significant wage increases unlikely, possibly further dampening the consumer appetite for spending. Measures need to be taken to prevent a downward spiral into recession.

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