News Analysis: Japan's economy contracts end 2-year growth streak, domestic demand-led recovery in question

Source: Xinhua| 2018-05-16 17:08:14|Editor: Yamei
Video PlayerClose

TOKYO, May 16 (Xinhua) -- Japan's economy shrank at an annualized rate of 0.6 percent in the January-March period, contracting for the first time in nine quarters, government data showed Wednesday.

The preliminary reading for the January-March quarter comes on the heels of a downwardly revised 0.6-percent annualized rate of expansion logged in the fourth quarter, the government data showed and on a quarter-on-quarter basis, GDP shrank 0.2 percent in inflation-adjusted terms, the Cabinet Office said.

According to the Cabinet Office, the fall in gross domestic product (GDP) in the recording period was owing to a slowdown in private consumption and capital expenditure.

Leading economist here said that while business spending is expected to increase looking ahead consumer spending will likely still remain pressured as households continue to tighten their purse strings amid stagnant wages.

Japan's first economic contraction in two years follows a solid run of growth on improvements in exports and reasonably consistent investment, but as Itochu Corp.'s Atsushi Takeda pointed out, the government's plan has been for the economy to be powered by domestic demand, led by an increase in private consumption, which has and still remains not to be the case.

Private consumption accounts for almost 60 percent of Japan's GDP and according to the government's latest data, consumption has fallen owing to a drop in spending particularly on automobiles and smartphones.

The Cabinet Office also pointed to inclement weather for the season in the recording period as denting consumption as consumers were disinclined to go out and the increased price for fresh produce also added to negative sentiment.

Yoshimasa Maruyama, chief economist at SMBC Nikko Securities Inc., said that while unseasonably cold weather may have played a part in private consumption dropping, the fundamental issue may lie with stagnant wage growth.

Under the stewardship of Prime Minister Shinzo Abe, the government has been trying to achieve what it calls a "virtuous cycle" of economic growth, which necessitates the increasing of wages to spur household spending and tackle deflation.

But the quarterly economic contraction underscores the difficulties the government and the Bank of Japan (BOJ) is having trying to reverse decades of deflation to achieve its many times delayed 2 percent inflation target, believed to be a lofty goal by many economists, amid tepid domestic demand.

The central bank recently reiterating that for market reasons it will not be putting a fixed date on when it plans to achieve its 2 percent inflation target has contributed to what that the BOJ has itself described as a "deflationary mindset" in Japan.

Despite a tight labor market and hopes for increased wages based on a solid reading in March, higher commodity prices are largely nullifying improving wages and ensuring households' purse strings remain tight, economists here have pointed out.

As an amalgam, economists said Wednesday, this has added to stifling domestic demand and somewhat scuppered the government's plans for a full-blown domestic demand-led recovery.

For the quarter, exports were down 0.6 percent from 2.2 percent the previous quarter, while imports increased 0.3 percent, with some economists believing that the outlook may be for a rebound in the second quarter on solid production and growth in the export sector, as well as improving wages.

However, the outlook, as the government's figures show, remains hazy.

Wage increases remain disputed among analysts, owing in part to the effects of increased commodity prices, and, according to the Ministry of Economy, Trade and Industry, industrial production is projected to rise 3.1 percent in April from March, and then drop 1.6 percent in May.

Looking ahead, external demand from Japan's big importers will be impacted owing to economic slowdowns and global growth has hit a plateau, with U.S. manufacturing hitting a slump in April and business confidence slipping in Germany.

While external demand for Japanese goods is slowing down, there are still global trade concerns and uncertainty pertaining to the U.S. and President Donald Trump's agenda, particularly as the mid-term elections draw closer.

For the year, median analysts predict growth for Japan's economy of around 1.3 percent, dropping from 1.7 percent projected last year, with a rebound in 2019 to 1.5 percent.

This marks a distinct slowdown in projected growth for Japan's economy and the last time the nation posted negative growth was in the October-December quarter in 2015 when it contracted an annualized 1.1 percent.