By Isita Misra
With a 1 per cent growth in the April-June quarter, Japans economy underwent the longest economic expansion in over a decade. The third largest economy managed six straight quarters of growth and outdid economists expectations with a 4.6 annualised growth rate. The most prominent force driving the economic expansion was the increase in domestic demand, which led to the rise in GDP despite a trade deficit. As India is also burdened with the problem of trade deficit, the economic growth of Japan can act as an example for India, through which it can learn how to utilise its resources and further move towards rapid economic development.
The story of Japans success
Japans economy saw its first negative quarter for trade in the April-June period with a 0.5 per cent contraction in exports and 1.4 per cent increase in imports. Despite the trade deficit, the economy was able to expand through the rise in domestic demand which increased by 1.3 per cent from the previous quarter. This period saw the fastest expansion of business investment and public consumption since 2014 as they grew by 2.4 per cent and 0.9 per cent respectively. The increase in domestic demand was fuelled by the combination of a tight job market and government spending.
A tight job market refers to a situation where an economy is close to full employment. Once an economy reaches this stage, recruitment becomes difficult and puts an upward pressure on wages. Japans rate of unemployment rate decreased to 2.8 per cent in June, the lowest rate in 23 years, and the job to applicant ratio reached an all-time high of 1:5 since 1974. Thus, the tight job market saw a 0.7 per cent growth in real wages which offset a drop in the savings rate and an increase in consumption. The second thing that led to an increase in the domestic demand was a mix of government spending, economic reforms, and enormous monetary easing which increased corporate profits and strengthened the stock market.
Foreseeable troubles
Ever since the collapse of the equity and property market bubble in early nineties, Japan has been struggling with slow growth rates and deflation. The pace of growth has been a positive sign towards battling deflation. However, inflation has been lagging behind the economy recovery. Furthermore, the domestic demand deflator has only gained 0.4 per cent, largely missing the target of 2 per cent set by the Bank of Japan. This can be attributed to the lack of wage growth that is needed to push up inflation. Therefore, the increase in domestic demand might help in easing the problem of deflation in Japan, but further economic reforms are needed to meet inflation goals in order for Japan to make complete economic recovery.
Another problem that can become a huge setback for Japans economy is the low birth rates which will cause a decline in labour and decrease in consumption in the near future. As the economy of Japan is one that is predominantly built on human resources rather than natural resources, the decline in labour can turn out to be a major crisis for the economy. In order to avoid this threat, Japan needs to focus on increasing technology that can substitute manual labour with machines. Moreover, the shift in demographics poses as a threat to the economy considering how it is now driven by domestic demand. Therefore, the threat of decrease in labour along with a decrease in domestic consumption can be a major obstacle for Japans economy.
Lessons for India
Indias trade deficit has been increasingly widening with the deficit increasing from USD 7.76 billion in July 2016 to USD 11.45 billion in July 2017. With an unemployment rate of 3.27 per cent, Indian still has a long way to go to fully realise the potential of its human resources. According to the United Nations International Labour Organisation, the economic growth trends are lagging behind employment needs and will lead to an increase in unemployment. Taking note from the present situation in Japan, if India works towards a tighter job market, the economy will not only benefit from increase in GDP through increase in production, but will also benefit from the higher domestic consumption that follows decrease in unemployment rate. Furthermore, Indias demographics point towards an increase in labour in the future which will further lead to economic growth in the country.
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