(Nikkei: October 2, 2015 – p. 2)
The risk of the Japanese economy facing a downturn is growing, as the Chinese economy is losing steam. The latest Tankan business sentiment survey released by the Bank of Japan became a testament to that fear.
Japan’s industrial production index fell on the month [in August] for the second straight month. Japan’s seasonally-adjusted growth is also forecast to have sunk into negative territory for the quarter through September.
To stem fears over Japan’s economic outlook, the government should steadily carry out structural reforms and raise the country’s growth potential.
The BOJ survey highlighted that the index of business sentiment among large manufacturers edged down for the first time in three quarters, while there was a slight improvement on the side of nonmanufacturers. In both cases, Chinese factors played a significant part.
Among manufacturers, business sentiment in the production and machinery segment weakened, as it mainly supplies goods to China to meet the country’s demand for capital spending. Meanwhile, the hotel and restaurant segment perked up, thanks to an increasing number of Chinese tourists to Japan.
It is widely seen that China is trying to curtail growth and shift to an economy led by consumption and services, from the conventional engine that relies on investment and manufacturing. That move is sending ripples – both strong and weak – to the Japanese economy.
A major concern is that both manufacturers and nonmanufacturers painted gloomy outlooks for the next three months. This is because they are becoming increasingly concerned about economic slowdowns in China and other emerging countries.
The Tankan also revealed that companies are planning to maintain their capital spending plans. Corporate earnings stayed at higher levels. Though personal spending remained weak, there were improvements in job and wage circumstances.
Japan is at risk of sliding into a recession, depending on the Chinese economy. Therefore it must keep a watchful eye on the country. In addition, the government and the BOJ could be pressed to take necessary steps once the global economy loses momentum.
At this moment, however, it is premature to conclude that full-scale economic stimulus measures are needed. Some people in the government and the ruling parties are demanding that a supplementary budget for fiscal 2015 be compiled to fund economic measures. But given Japan’s worst debt-to-GDP ratio among industrialized countries, the government should not easily tap into state coffers if that method is not cost effective.
International Monetary Fund Managing Director Christine Lagarde also noted: “Japan should prioritize formulating a medium-to-long term fiscal program.”
What the world expects of Japan is not to stimulate the economy temporarily but to solidify its growth foundation from a long-term perspective. The government should pave the way toward lowering the country’s effective corporate tax rate and overhaul rock-solid regulations.