News Analysis: Slump in domestic demand casts shadow over Japan's economic recovery

Source: Xinhua| 2020-02-19 20:08:11|Editor: xuxin
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TOKYO, Feb. 19 (Xinhua) -- Japan's economy after inflation adjustment grew 0.7 percent last year, continuing a slow recovery, while it slumped in the fourth quarter of 2019, hit by a weak domestic demand, according to preliminary government statistics released Wednesday.

Experts have said that the slump in domestic demand is casting a shadow over Japan's economic recovery.

The inflation-adjusted gross domestic product (GDP) fell 1.6 percent in the fourth quarter of last year from the previous quarter, according to the data, or an annualized 6.3 percent, a drop much larger than the average market forecast.

In terms of the contribution of internal and external demand to economic growth, external demand was no longer a drag on growth in the fourth quarter of last year. Exports continued to decline in the quarter, narrowing to a 0.1-percent month on month decline. Exports to China and other Asian countries and regions increased, while exports to Europe and the United States fell. Meanwhile, imports fell 2.6 percent month on month, with net exports, which offset imports, contributing 0.5 percentage points to growth.

A sharp decline in domestic demand was the main reason for the economy's apparent contraction in the quarter, contributing a negative 2.1 percent to growth. Private consumption, which accounts for more than half of Japan's economy, fell 2.9 percent month on month, led by a 12.8-percent drop in consumer durables. Business equipment investment also fell 3.7 percent.

Analysts have said that early consumption in the third quarter, triggered by the consumption tax increase in October, was the main reason for the apparent decline in domestic demand in the fourth quarter.

Compared with the 60-percent tax increase in 2014, the consumption tax was raised by only 25 percent in 2019. In order to avoid consumption decline caused by the tax increase, Abe's cabinet introduced a series of measures such as cashless bonus points. The Japanese government had expected that the tax increase would not have a significant impact on consumption.

The sharp decline in domestic demand in the fourth quarter of last year despite the government's measures was a sign that the real condition of the economy is weak, said Kentaro Arita, an economist at Mizuho Research Institute.

In addition to the impact of the tax increase, Japan also faces a weak consumer base, he said. Manufacturing production and earnings have deteriorated against a backdrop of falling exports, leading to a slowdown in hiring and incomes that has dampened consumption, Arita said.

The sharp drop in domestic demand caused widespread concern, given that personal consumption had fallen for 13 consecutive months after the consumption tax was raised in 2014. Many institutions and experts said that the decline in domestic demand will cast a shadow over the prospects for Japan's economic recovery.

In terms of domestic demand, the recovery of Japan's personal consumption will be relatively slow due to slow growth in household income and low consumption psychology, said Takeshi Minami, a researcher at Norinchukin Research Institute. In terms of external demand front, Japan's export will continue to decline despite signs of a recovery in semiconductor-related industries, given that the world economy and trade as a whole remain in a sluggish trend.

Minami said he predicts that Japan's economy would likely experience two consecutive quarters of negative growth between the fourth quarter of last year and the first quarter of this year.

Apart from sluggish personal consumption, deteriorating leading indicator of private equipment investment and declining exports, Japan's economic recovery in 2020 faces other difficulties as Olympics-related projects and infrastructure projects are completed, and the Olympic construction demand that has fueled Japan's economic growth in recent years will gradually end.

Daiwa Institute of Research said in a report that Japan's economic speedup may only come when the impact of the tax increase is fully digested, or the contribution of external demand to economic growth turns into significantly positive, which will take some time. Japan's economic growth is expected to slow in 2020, the report said.