A snail’s pace

The Japanese economy has continued, at best, to limp forward. After posting 2.2-percent gross domestic product (GDP) growth in 2006, Moody’s Economy.com forecasts a 1.8-percent figure for 2007. Economists at Westpac Institutional Bank project 2.1-percent GDP for 2007.

Although Japan’s growth has remained in positive territory over the past several years, it remains unimpressive. On a quarter-by-quarter basis, Credit Suisse economists forecast a 1.6-percent reading for Q1, 1.6 percent for Q2, 0.4 percent for Q3, and 1.9 percent for Q4.

What’s the missing link in Japan’s recovery?

So far it has been the consumer. While corporate profits and business investment have been strong, the consumer has been sitting on the sidelines amid soft wage growth and weak consumer confidence readings. Economists say the key to a stronger growth pattern in Japan will be a broader base for the economic recovery, which now is somewhat one-sided.

“While the economic expansion has seen large job growth and tighter labor markets, it hasn’t translated into higher wages,” says David Powell, currency analyst at Ideaglobal. “Wages have been falling for quite some time in Japan, resulting in a large decline in the savings rate. People have been supporting their consumption by buying from their savings.”

Looking at some hard numbers, year-over-year cash earnings (the income rate) fell 1.4 percent in January 2007, Powell notes.

“Until consumers get paid more, the sustainability of consumption is still in question,” he says.

Charmaine Buskas, economist at Moody’s Economy.com, agrees with this assessment.

“Business investment and corporations are doing well,” she says. “It is a promising recovery, but it lacks a broad base.”