Japan's real gross domestic product (GDP) grew an annualized 4 percent in the April-June period from the previous quarter. This marked positive GDP growth for the country for six consecutive quarters, but the latest figure stands out compared to the previous annual growth rate of 1-2 percent.
The leading factor for the 4-percent growth was a spike in consumption, which had remained flat. Japan's economic growth had been supported by exports, but a country can be easily affected by the economies of other nations when relying too much on foreign demand. For stable growth, a domestic demand-led economy is favorable, which is also the goal of Prime Minister Shinzo Abe's economic policy mix dubbed "Abenomics" -- thereby the administration aspires to achieve a positive growth cycle.
The Abe government's prowess in establishing the foundations for economic growth led by domestic spending is being tested.
A dominant view among economists, however, is that the growth in spending is temporary. While home appliance sales were brisk in the April-June period, this could be attributed to the fact that home electronic products bought in bulk due to economic stimulus measures after the 2008 global financial crisis now need to be replaced. Good weather in that period also contributed to strong spending on leisure activities and dining out at restaurants.
When these factors are excluded, it is believed that the budget-minded spending behavior among consumers has remained persistent. This is because of slow wage growth. If spending was recovering on a full scale, prices should also go up, but the inflation rate remains at the zero-percent level.
Furthermore, it is forecast that the July-September growth will slow down due to the negative effects of bad weather this summer on spending on leisure and other activities. Unless GDP figures are supported by a solid economic base, they are easily swayed by temporary factors.
Japan can only achieve a less than 1 percent potential growth rate even if economy-driving factors such as labor, production capacity and technology are put into full use. Four-percent growth is far above the country's actual capacity and too good to be true. The government has set a growth target of 2 percent or higher. There is a need to raise the level of the potential growth rate through reforms.
It has been over four and a half years since the Abe administration launched its Abenomics policy measures. While this should have been enough time to execute reforms, the government has prioritized immediate issues. Last year, Prime Minister Abe postponed the consumption tax hike that had been scheduled for April 2017, saying that Japan's economy needed to be bolstered before raising the sales tax. Unless stable resources to support Japan's aging society are secured, public anxiety over social security will not be removed, and consumers will keep their purse strings tight.
Japan's population is shrinking and so is its domestic market. Companies are reluctant to raise wages if they cannot picture growth. As resources are limited, the government should prioritize budget allocation to measures to increase the birthrate. In addition, deregulation is important for firms to enter growing industries.
Reforms are sometimes accompanied by pain. At the same time, this is Japan's first positive GDP growth for six consecutive quarters in 11 years. Such a stable economic environment should be taken as an opportunity to boost reforms.