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Japan’s Economy Dodges Recession

Japan’s Economy Dodges RecessionJapan’s Economy Dodges Recession

Japan’s economy grew more robustly than expected in the first quarter of this year, at a 1.7% annual pace, but economists expect the expansion to slow in the current quarter.

Solid consumer demand and higher government spending helped offset relatively weak business investment in January-March. But data since then have been discouraging, and a major earthquake in southern Japan last month likely will drag on growth in this quarter, economists said. From the previous quarter, the economy inched up 0.4%, AP reported.

“Japan’s GDP figures are notoriously volatile, and with output flat compared to a year ago, there can be no doubt that the economy is not doing well,” Marcel Thieliant of Capital Economics said in a commentary. In the fourth quarter, gross domestic product contracted 0.4%.

The recent weak data have raised expectations that Prime Minister Shinzo Abe may put off a planned sales tax increase due in April 2017 to prevent further disruptions, given the faltering progress toward a sustained recovery.

The worry is that raising the sales tax to 10% from the current 8%—a move already postponed once due to the outsized negative impact of the last sales tax hike—could hurt revenues more than help if the economy falls back into recession.

But holding off on the sales tax hike would undermine efforts to repair the government’s tattered finances.

 Small Boost

The overall growth figure likely got a small boost from the extra leap year day in February, economists said.

Private consumption, which accounts for the largest share of growth, rose 1.9% in annual terms in January-March, while public demand expanded by 2.6%. Business investment fell 5.3% and spending on housing also declined.

Under Abe, who took office in late 2012, Japan’s policymakers have tried to spur growth by pumping cash into the economy through central bank asset purchases, stronger public spending and other strategies meant to convince consumers and businesses to spend, by creating demand that would fuel a “virtuous cycle” of growth.

After three years, the recovery is still limping along.

“Consumer spending made a solid contribution to growth in the first quarter, but weak business and residential investment prevented Japan’s economy from reaching escape velocity,” Bill Adams, senior international economist at PNC Financial Services Group, said in a note.

Meanwhile, a Reuters poll showed that the Bank of Japan will ease monetary policy even further by July as a strong yen and still-sluggish economy threaten its ability to meet its ambitious inflation target.

Asked what steps it would take next, 80% of analysts surveyed May 11-17 picked a combination of cutting negative interest rates further and boosting its purchases of government bonds, exchange-traded funds and corporate bonds.

Financialtribune.com