Japan's Economy Contracted in the First Quarter as Consumer Spending Lagged - Latest Global News

Japan’s Economy Contracted in the First Quarter as Consumer Spending Lagged

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Japan’s economy contracted in the first quarter as consumer spending hit its longest downward trend since early 2009, posing challenges to the central bank’s plans to tighten monetary policy.

Falling business spending and exports helped GDP fall 2 percent on an annual basis, more than analysts had forecast, according to preliminary data released by Japan’s Cabinet Office on Thursday.

On a quarterly basis, the decline was 0.5 percent, after GDP stagnated in the fourth quarter and fell 0.9 percent in the July-September period.

Household spending, which accounts for more than half of Japan’s GDP, fell 0.7 percent from the previous quarter. This was the fourth straight quarter of decline as consumers cut spending and the weaker yen pushed up food and energy costs. Corporate spending also fell by 0.8 percent.

Economists said the latest disappointing data would pose a challenge for the Bank of Japan, which is counting on a rise in wages and prices to permanently end Japan’s struggle to curb deflation and pave the way for interest rate hikes.

The BoJ ended its era of negative interest rates in March and raised borrowing costs for the first time since 2007.

Labor Ministry data showed this month that Japan’s inflation-adjusted real wages fell 2.5 percent year-on-year in March for the 24th month. BoJ officials are confident that sharp wage increases promised by the country’s biggest employers will reverse the trend later this year and lead to a rebound in domestic demand.

“It’s hard to believe that consumption will increase so much,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute. “Even if real wages turn slightly positive later this year, this will not immediately lead to an increase in consumption. There is a possibility that people would use this money to save rather than spend.”

The BoJ has come under pressure to increase the pace of interest rate hikes, with the yen weakening against the dollar, even as the Treasury is spending an estimated $59 billion to strengthen the currency from a 34-year low.

“If the price outlook is revised upward or the upside risks become high, it is appropriate for the bank to adjust the key interest rate earlier,” BoJ Governor Kazuo Ueda said in a recent speech, pointing out that exchange rates would change interest rates had more of an impact on prices than in the past.

The decline in first-quarter GDP was also due to disruptions in automobile production following a safety testing scandal at Toyota subsidiary Daihatsu and damage from an earthquake that struck the Noto Peninsula on Japan’s west coast on New Year’s Day.

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