South-Western College Publishing - Economics  
Spending Spurs Japanese Economy
Subject Consumer Spending
Topic Productivity and Growth
Key Words

Consumer Spending and Economic Growth

News Story

Japan's economy expanded in the first quarter of 2005 at the fastest pace since the same period a year ago. Gross Domestic Product (GDP) grew at an annualized rate of 5.3 percent for the quarter ending 31 March 2005, compared to the first quarter of 2004, when the economy grew at a rate of 6 percent.

The Japanese economy has been in a mild recession since April of 2004, growing by only 0.1 percent in the final quarter of 2004. The economy's problems stemmed partly from uncontrollable events that influenced economic activity. A series of typhoons and a strong earthquake in northern Japan severely dampened consumption spending and business activity. Many analysts attribute the fast growth rate in the first quarter of 2005 to consumer spending bouncing back as the effects of the natural disasters ebbed.

"A lot of the improvement is just the reversal of temporary bad factors we had in the fourth quarter," said Peter Morgan, an economist for HSBC Securities (Japan) Ltd. "I doubt that the rate we see in the first quarter will be sustainable." Household consumption accounts for more than half of Japanese economic activity, and it grew at an annual rate of 4.8 percent in the first quarter of 2005. This strong growth is likely to create more jobs in Japanese businesses and thus improved per-capita household income, a development that can spur consumption even further.

Unemployment also fell in Japan to a six year low of 4.5 percent in March 2005. For the first time in eight years, big companies increased the winter bonus payments given to employees last year. Traditional Japanese bonuses can add up to the equivalent of several months' salary; such windfalls can add more fuel to consumer spending.

Improving economic conditions have led Japanese consumers to have more confidence in the economy. The Cabinet Office's index of consumer confidence rose to 47.4 in April, from 45.2 a month earlier. "There is a higher likelihood of recovery in private consumption," stated Mikihiro Matsuoka, chief economist for Deutsche Bank in Japan.

Exports have long been the driving force of the Japanese economy, but exports have waned in recent months. Fortunately for Japan, consumer spending outstripped sagging exports to post the strongest economic growth in a year.

Questions
1.

In an aggregate demand/aggregate supply model of the economy, consumer spending represents the household sector. Name the other types of spending that make up aggregate demand.

2. If consumers spend more out of any increase in income, they are saving less. How does this affect the spending multiplier?
3. Discuss the importance of consumer spending to the Japanese economy relative to its importance in European and U.S. economies.
Source Todd Zaun, "Strong Growth in Economy as Japanese Start Spending," The New York Times Online, May 17, 2005.

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