Making the most of Japan’s longest economic recovery

Government officials have announced that Japan is currently going through its longest economic recovery in the postwar period. But that doesn’t necessarily mean people are happy. Rather, many seem to feel they haven’t been able to enjoy the fruits of that economic expansion.

The period we're looking at began in December 2012, when Prime Minister Shinzo Abe took office for the second time. Although we need to wait a while for analysts to make the official call, the government says we are in the country’s longest economic recovery since World War 2. So, why the lack of excitement?

Reason number one: It’s the "longest" economic recovery, but that doesn't make it a "strong" recovery. During the 57 months from 1965 to 1970, Japan experienced average annual growth of more than 10 percent through the so-called "Izanagi Keiki." Then, during the late 1980s through to 1991, the bubble economy saw average growth of 5 percent.

The longest economic expansion period before now was the "Izanami Keiki" between 2002 and 2008 with an average 1.6 percent growth. However, the present growth period is ticking along at just 1.2 percent.

Reason number two: The economic expansion is mainly benefitting the business sector, not ordinary people. Thanks to public spending and the Bank of Japan’s aggressive monetary easing, the Nikkei average has doubled over the last 6 years, while corporate earnings have hit record highs. However, real income for households saw a decline during that same period. With little rises in wages, higher social security premiums and bigger bills all round, it’s not much of a surprise that people are not out celebrating. Saving the country from falling into a depression is a clear achievement, but people say they have yet to feel the benefit of Abenomics.

The next question is how much longer the recovery will last.

Analysts are recently more pessimistic about Japan’s outlook. Exports have been supporting the country’s trade balance, but the global economy seems to be decelerating at a much faster pace than predicted.

China has been hard hit with its own social and political reforms and, of course, the trade tensions with the US. The official GDP growth for 2018 was 6.6 percent, the lowest in 28 years. But perhaps more shocking, is a report that a Renmin University scholar claimed last month that the actual number was just 1.67 percent according to a "secret government research group."

Meanwhile, Europe is suffering too, with Germany falling into negative growth and the challenge posed by the UK's Brexit uncertainties.

The US is also facing the consequences of the current trade friction with China, as well as the diminishing effects of President Trump’s tax cuts. That's all bad news for Japanese exports.

That said, capital investment within Japan has been strong. New hotels are under construction ahead of the 2020 Tokyo Olympics and Paralympics. The construction sector has been booming, but many analysts predict that may have peaked already.

A cheaper yen has been also been helping to lift the economy, but that might not continue. The US Federal Reserve may slow or halt further monetary tightening, meaning that the dollar could weaken further against other major currencies.

And with Japan due for another consumption tax hike in October, the country is indeed facing a major challenge if it's to prevent the economy deteriorating.

Here’s what’s needed to ensure Japan’s stronger growth.

Firstly, nothing new. Company managers should increase base pay for their employees. We’ve been talking about creating a virtuous economic cycle that will boost both the corporate and household sectors for some time. But, so far, that hasn’t happened. Keidanren -- the Japan Business Confederation -- recently declined to set a target for 2019 pay increases. Last year, it called for a 3 percent increase. But with the global economic uncertainty, companies are likely to be wary about handing out bigger pay checks this year. Nevertheless, executives should remind themselves that their decision could shrink the economy as a whole.

Moreover, businesses should also invest more in human resources development. Some experts point out that while capital investment is regarded as a company asset, human investment is regarded as a bothersome cost.

Lastly, the corporate sector needs to step up its efforts to create new businesses. We’ve seen Google, Apple, Facebook, Amazon and so many others creating new jobs. Here in Japan, we are seeing few new global players evolve, meaning that there has been not enough deregulation and moonshot investments.

Japan's leaders, in both the government and business sectors, should keep in mind that they may not have much time before the economy starts to falter. They need to think carefully and clearly before deciding on the best path to make the most of Japan's longest economy recovery.