Decline of GDP Requests Structural Reform

The Economic and Social Institute of the Cabinet Office released the quarterly estimates of GDP for the first quarter (January to March) of 2024. The real GDP, excluding the influence of price fluctuation, marked 0.5 percent of decline from the previous quarter, which would be equivalent with 2.0 percent of annual decline. Decline in personal consumption and corporate capital investment indicates slow progress of Japanese economy on its way to get rid of deflation. 

It was the consecutive decline of real GDP for two quarters. In the first quarter of 2024, there was a major decline in car production, caused by stopping of shipment by Daihatsu Motors which revealed irregularities in the certification of its cars. The major earthquake in Noto Peninsula on new year’s day may also have caused the decline of economic activities.

 

Personal consumption, which occupies over a half of GDP, declined by 0.7 percent, marking consecutive decline of four quarters. It was the first time for Japanese economy to experience consecutive decline of four quarters, since the time period between April 2008 and March 2009, when it suffered from Lehman Shock.

 

Not only purchases of cars but sales of durable goods such as smart phones marked decline. In addition, capital investment of corporations decreased by 0.8 percent from the previous quarter. Companies were not active in buying cars and trucks as well as production machineries.

 

Expenditure for private housing declined by 2.5 percent, with decrease of new housing caused by price hike of architectural materials and scarcity of human resource. Meanwhile, governmental investment on infrastructure increased by 3.1 percent. As a side effect of decline in car products, export decreased by 3.4 percent. The consumption of foreign travelers, which is included in exports, increased by 11.6 percent.

 

It was indicated that the influence of car manufacture is still large in Japanese economy. Japanese economy needs structural reform to cultivate other industries to lead further growth. It is estimated that brand new technologies such as artificial intelligence is less contributing to Japanese economy than it does in Republic of Korea or Taiwan. Supporting semiconductor industry may be crucial for future growth.

 

The economic decline in the first quarter of 2024 is basically regarded as a temporary tendency. Most economists expect Japanese economy to recover in the second quarter both in personal consumption and corporate capital investment.

 

OECD Economic Outlook in May expects 0.5 percent of Japan’s GDP growth in 2024, while the United States is projected as having 2.6 percent of growth. Whether the measures taken by Kishida administration, including tax cut in June, will contribute real wage hike may be the key to a positive cycle of economy.

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