Japan's economy shrinks as surging costs raise spectre of deeper downturn

Gross domestic product contracted at an annualised pace of 1 per cent in the quarter through March. PHOTO: REUTERS

TOKYO (BLOOMBERG, REUTERS) - Japan’s economy shrank in the first three months of this year as soaring import costs outweighed export gains, and restrictions triggered by the Omicron variant of the coronavirus stunted consumer spending. 

The world’s No. 3 economy contracted at an annualised pace of 1 per cent in the quarter through March, the Cabinet Office reported on Wednesday (May 18). Economists had expected a decline of 1.8 per cent. 

The setback to Japan’s already sluggish recovery from the pandemic stemmed from a deterioration in overall trade as import prices surged, exacerbated by the war in Ukraine and the weakening yen. The 3.4 per cent non-annualised gain in imports turned the net impact of trade negative on the economy even though exports rose 1.1 per cent from the previous quarter. The monthly trade balance has been in the red since August.

Consumer spending also stalled as quasi-emergency curbs cut business hours and restricted activity during the record virus wave. The fourth quarterly contraction of the pandemic leaves Japan lagging behind its global peers in regaining lost ground. 

While more recent figures show an uptick in spending and foot traffic after infections dropped and restrictions were lifted, the release of pent-up demand that would fuel a rebound this quarter is likely to be limited by the impact of elevated energy and import prices. 

Japan’s benchmark inflation gauge is forecast to jump towards 2 per cent in a report due on Friday as energy prices soar and the effect of cheap mobile phone fees fades out. Cost pressures for companies rose at a double-digit pace for the first time in April since 1980, intensifying pressure on firms to pass on higher costs to consumers.

China’s slowdown induced by its strict Covid-19 lockdowns also clouds the prospects for a robust rebound as it weighs on global trade and renews pressure on supply chains.

Bloomberg Economics analyst Yuki Masujima said: “Looking ahead, we expect gross domestic product (GDP)  to rebound in Q2, driven by pent-up demand after the virus curbs were lifted on March 21. Even so, higher commodity prices and the impact of China’s Covid-19 lockdowns on exports pose downside risks to the outlook.”

“We expect GDP growth to disappoint across 2022 due to the hit to household income from higher inflation and signs that elderly consumers remain wary of catching the virus,” Mr Tom Learmouth, Japan economist at Capital Economics, wrote in a note.

The weak reading may pressure Prime Minister Fumio Kishida to release even more stimulus with Upper House election scheduled for July 10, following the 2.7 trillion yen (S$29 billion) in extra budget spending compiled on Tuesday.

“The economy will return to growth in the coming quarters but it won’t be a dramatic recovery, leaving the possibility of further spending wide open as the election draws near,” said senior economist Hiroshi Shiraishi at BNP Paribas Securities.

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