Japan Economy Shrinking

Japan's economy is expected to have contracted for the first time in two years in the first quarter due to weak private consumption and softer export demand, a Reuters poll showed on Friday.

A negative reading, while slight, would snap Japan's longest period of economic expansion—eight straight quarters of growth—since its 1980s bubble economy.

But analysts said the expected January-March weakness may be only a temporary soft patch, arguing that higher prices for fresh vegetables and bad winter weather likely weighed on consumer spending in the quarter.

The global economy also has remained firm, suggesting Japan will regain traction in the second quarter, they added.

Gross domestic product probably shrank at an annualized rate of 0.2% in the first quarter after a 1.6% of expansion in the final quarter of 2017, the poll of 18 analysts showed. That would mark the first contraction in the world's third-largest economy since late 2015.

The annualized contraction would translate into a flat reading from the previous quarter. "The economy had steadily recovered but it appeared to have come to a temporary standstill," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

"Economic indicators such as factory output and firms' business sentiment have shown a softening momentum of the economy. The GDP data will likely reflect those moves."

Private Consumption Falls

Analysts believe there was no growth in private consumption in the quarter, after a 0.5% gain in the final quarter last year. Private consumption accounts for 60% of GDP.

External demand—or exports minus imports—also provided no contribution to GDP, the poll found. Japan's exports rose less than expected in March and a business survey showed export order growth slowed sharply in April due to a stronger yen.

Capital spending was forecast to rise 0.4% in the quarter, slowing from a 1% increase in the previous period but still up for a sixth straight quarter.

"The economy is expected to return to the pace of around annualized 1% growth from April-June but we need to pay attention to impacts from the United States' trade protectionism including the currency movements," said Yusuke Ichikawa, senior economist at Mizuho Research Institute.

GDP data will be released on May 16.

Machinery Orders, Core CPI

The poll also predicted machinery orders fell 3% in March from the previous month, when they grew 2.1%. The highly volatile data series is regarded as an indicator of capital spending in six to nine months. It would be the first decline in three months after a 2.1% growth in February and a 8.2% jump in January.

Still, machinery orders likely rose for the third straight quarter in Jan-March versus the previous quarter, analysts say. "Capital spending is staying solid despite the bearish tone of domestic and overseas economies and it will likely retain its positive movement," said an analyst at SMBC Nikko Securities in the survey.

Machinery order data will be released on May 17.

The poll also found the core consumer price index, which includes oil products but excludes volatile fresh food prices, rose 0.8% in April from a year earlier, a touch less than the 0.9% gain seen in March. Core CPI is due out on May 18.

The Bank of Japan's corporate goods price index, which measures the prices companies charge each other for goods and services, likely grew 2% in April.

Call to Step Up Structural Reforms

Bank of Japan Governor Haruhiko Kuroda said more work needs to be done to boost the country’s growth potential, making a rare call for the government to deliver on its growth strategy—the third arrow of Premier Shinzo Abe’s reflationist policies.

(Abe introduced “three arrows” for economic recovery and growth.  The first and second arrows were launched earlier in 2014, as monetary easing to fight deflation and flexible fiscal injections to support economy.  The third arrow aims at revitalizing industries, creating markets for selected sectors with the promise of future growth and expanding global outreach.)

Kuroda said the government had made “significant” progress on reforms to fix Japan’s worsening fiscal state, albeit with some delay.

The BoJ also agreed with the government on the need to maintain its ultra-loose monetary policy to lift Japan sustainably out of deflation, he said.

Still, Kuroda said there was more work to be done on deregulation and structural reforms, the third arrow of the premier’s “Abenomics” policies to reflate the economy.

Critics say the Japanese labor market and heavily-protected industries, such as healthcare and the agriculture sectors, are in urgent need of reform.

“It’s true there is some lag before the steps already taken begin to affect the economy. We need to take that into account,” Kuroda told parliament on Friday.