Japan's Economy Stalls as Poor Performance Spreads to Three Quarters - Latest Global News

Japan’s Economy Stalls as Poor Performance Spreads to Three Quarters

Japan’s economy contracted in the first quarter as consumers and businesses cut spending. That continued a dismal trend that stretches back to last summer, complicating the picture for the central bank as it considers the timing of its next interest rate hike.

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(Bloomberg) — Japan’s economy shrank in the first quarter as consumers and companies cut spending, extending a dismal performance that stretches back to last summer and complicates the picture for the central bank as it mulls the timing of its next interest rate hike.

Gross domestic product contracted at an annualized pace of 2% in the three months through March, the Cabinet Office said Thursday. Economists had forecast a contraction of 1.2%. Private consumption and capital spending both retreated, while net exports also dragged. 

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The report showed the economy has not grown since last spring, as updated figures for the final quarter of 2023 were revised to show the economy stagnating after the summer slump.

The result reflects the negative impact of a New Year’s Day earthquake northwest of Tokyo and disruptions in auto production and sales after a certification scandal erupted at Daihatsu Motor Co., a subsidiary of Toyota Motor Corp.

While these factors can be dismissed as temporary, the ongoing impact of the strongest inflation in generations is a more lasting problem. Household spending continues to fall as workers, struggling with continued declines in real wages, tighten their budgets. Private consumption has now fallen for the fourth quarter in a row, the longest period of decline since the global financial crisis.

The weak results come as the Bank of Japan is scrutinizing data to determine when it should next raise interest rates after it made its first rate hike in 17 years in March.

“The BOJ cannot ignore these GDP numbers. “This is not at all the situation where they can immediately raise interest rates again,” said Nobuyasu Atago, chief economist at Rakuten Securities Economic Research Institute. “I don’t think they can move in July. They will have to wait until the second quarter GDP data is released in August.”

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Many economists expect the BOJ to take further action later this year. They forecast an economic recovery in the quarter ending in June as auto production recovers and wage increases improve consumer sentiment. Many families will also receive one-off tax relief from June.

What Bloomberg Economics Says…

“Japan’s GDP contracted more than the market expected in the first quarter due to one-off factors – and will not deter the Bank of Japan from normalizing its policies.”

— Taro Kimura, economist

For the full report click here.

While first quarter data painted a bleak picture for the economy, there were also positive developments. In the first quarter, companies emerged from annual negotiations with unions promising the biggest wage increases in three decades. The prospect of higher wages, which would ultimately boost consumption, was a factor in the BOJ’s decision to raise interest rates in March.

It remains to be seen whether consumer spending will pick up sharply. Subsidies designed to limit rising utility costs are set to expire at the end of May, and the yen’s weakness is weighing on sentiment across a wide range of service industries.

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“Rising prices, especially for everyday essentials, have cooled consumer sentiment,” said Hiroshi Miyazaki, senior research fellow at the Itochu Research Institute. “As far as future consumption developments are concerned, I assume that rising wages and higher prices will work against each other.”

Japanese authorities and business leaders have expressed concern about the currency’s weakness, which has squeezed households and small businesses by driving up the cost of imported energy and other materials, even as exporters such as Toyota reported robust results.

The BOJ currently assumes that cost-driving inflation will continue to ease and lead to demand-driven price increases. Governor Kazuo Ueda said the central bank would consider measures if exchange rate movements had a major impact on inflation trends.

The yen’s recent strong moves after falling to a new 34-year low against the dollar suggest that Treasury authorities have intervened in the foreign exchange market to support it. The outflows from the BOJ’s accounts suggest two likely interventions worth around 9.4 trillion yen ($60.8 billion).

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A revision to first-quarter GDP figures is due on June 10, four days before the BOJ’s next monetary policy decision, as speculation grows that the central bank could raise interest rates again in the coming months, citing the weak yen the factors that favor an early step.

The central bank will meet again in July and will then update its price and growth forecasts before authorities get a glimpse of preliminary second-quarter GDP statistics on August 15.

In addition to its direct impact on shoppers and businesses, the weak yen has caused a symbolic setback for Japan and its embattled Prime Minister Fumio Kishida by reducing the size of the Japanese economy in dollar terms.

Last year, Germany overtook Japan as the world’s third largest economy. The International Monetary Fund’s April forecasts now show Japan falling to fifth place behind India in 2025, a year earlier than the IMF predicted in October.

Kishida has sought to change the narrative of the Japanese economy by declaring that the nation is on the verge of a tipping point that will usher in a period of new capitalism. At the same time, the prime minister has failed to announce a definitive end to the deflationary spiral that eroded the value of the economy for years after the country’s asset price bubble collapsed around 1990.

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In March, Kishida said his government’s purpose was to prevent renewed deflation. He pledged to ensure that workers’ income gains outpace the pace of inflation this year.

Against the backdrop of a political slush fund scandal and simmering consumer frustration over the rising cost of living, Kishida’s approval ratings were dismal. In an NHK poll this month, his Cabinet’s approval rating was 24%, up one percentage point from April.

On April 28, the LDP lost a special election, which Kishida said was partly a judgment call on his performance. The party’s next leadership vote will take place in September.

(Adds comments from economist)

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