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EDITORIAL: Weak domestic demand requires caution; flexible policy needed

TOKYO (The Japan News/ANN) - Despite the growth rate remaining in positive territory, the economy has been shown to be less strong in substance. As there is anxiety about unfavourable changes in the global economy, it is necessary to exercise continued caution about future economic conditions.

Despite the growth rate remaining in positive territory, the economy has been shown to be less strong in substance. As there is anxiety about unfavorable changes in the global economy, it is necessary to exercise continued caution about future economic conditions.
 Preliminary estimates for the real gross domestic product (GDP) during the January-March period in 2019 point to an increase of 0.5 percent from the previous quarter, or annualized growth of 2.1 percent. The figures mark a second quarter of consecutive growth. The growth rate has risen from 1.6 percent in the previous quarter.
 Amid a succession of economic indicators showing business slowdown, the latest figures pointed to an unexpectedly high growth rate. This is mainly due to a considerable decrease in imports, reflecting weak domestic demand. There were reductions in exports to China and elsewhere, but imports declined to a level lower than that for exports. Consequently, overseas demand contributed to the growth on balance.
 This growth cannot be described as a self-sustaining recovery led by domestic demand.
 The specifics of domestic demand show an increase in housing investments against the backdrop of a last-minute rise in demand before the planned increase in the consumption tax rate. Public works investments also increased greatly. In response to last year’s earthquakes, torrential rains and other natural disasters, there were additions to budgetary appropriations for disaster-risk reduction and mitigation measures.
 On the other hand, personal consumption, which accounts for more than half of GDP and constitutes a main pillar of domestic demand, decreased for the first time in two quarters. Sales of new cars and winter clothing were rather difficult to promote.
 Due to the economic slowdown overseas, there was a downward turn in capital investments by corporations, as they moved to postpone such activities.

Prepare for tax rate increase
 “An upward trend in domestic demand has been kept intact,” economic revitalization minister Toshimitsu Motegi said, citing favorable employment and income environments as well as the corporate sector’s high-level business performance. However, the economic situation has reached a phase in which careful assessment is required.
 With respect to the diffusion index for March, the Cabinet Office assessed the basic condition of the economy as “worsening.” Some have pointed out the possibility that the current economic recovery — said to be the longest in the postwar years — is already over, adding that the economy may have entered a recession phase.
 Looking into the future of the economy, there is cause to worry over global economic trends. As U.S.-China trade friction becomes even more intense, it is difficult to expect that the Chinese economy will pick up due to pump-priming measures during the latter part of the year. There are concerns that exports from Japanese companies could be dealt a blow, further dampening capital investments and consumption.
 The consumption tax rate will be raised in October. In covering snowballing social security costs and making progress in fiscal reconstruction, the consumption tax is an important and stable source of revenue.
 To smoothly come through the tax rate increase, the government should make meticulous preparations for economy-stimulus measures such as a program for people to earn shopping points if they make cashless payments at small and middle-sized shops. Flexible policy management is required.
 Efforts should also be made to achieve an economic environment that is led by private-sector demand. It is important to devise a long-term strategy for continuing wage hikes and fostering cutting-edge industries. The government must show concrete measures that can produce results, among other things, through a new version of the “Basic Policy on Economic and Fiscal Management and Reform,” which it will put together as early as June.

(From The Yomiuri Shimbun, May 21, 2013)

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