Japan's economy shrinks in Q1 after two-year run of growth

TOKYO • Japan's economy shrank for the first time in two years during the first quarter, contracting more than expected on a surprise fall in business spending and flat private consumption. Yet economists expect a rebound in the current quarter as the global economy regains traction.

Gross domestic product (GDP) contracted at an annualised rate of 0.6 per cent in the three months ended March 31. Growth in the final quarter of 2017 was revised down to 0.6 per cent from 1.6 per cent.

Private consumption was unchanged in the first quarter from the previous three months while the contribution of net exports, or shipments less imports, to GDP growth was 0.1 percentage point. Business spending declined 0.1 per cent from the previous quarter.

Japan's economy had expanded at well above its potential growth rate for a year, as strong export growth fuelled production and investment, helping to raise wages and inflationary pressures. The first-quarter slowdown likely sapped progress on inflation.

Goldman Sachs predicted core inflation fell last month to 0.7 per cent. Yet most economists see GDP rebounding in the current quarter, fuelled partly by better exports and production.

The decline was partly due to temporary factors such as higher vegetable prices and a drop-off in smartphone sales, said a statement from Economy Minister Toshimitsu Motegi. The government expects the recovery to continue, centred on private consumption and investment, he added.

"This will not be a turning point, but is temporary," said Norinchukin Research Institute chief economist Takeshi Minami. "Overall domestic demand was weak with sluggish consumption and capital investment. But people are earning more."

Nomura Securities senior economist Masaki Kuwahara said: "Weak consumer spending, capital spending and exports contributed to the negative GDP growth. These components should show some pickup in the second quarter as the global recovery continues .

Japan's economy had expanded at well above its potential growth rate for a year, as strong export growth fuelled production and investment, helping to raise wages and inflationary pressures. The first-quarter slowdown likely sapped progress on inflation. Goldman Sachs predicted core inflation fell last month to 0.7 per cent. Yet most economists see GDP rebounding in the current quarter, fuelled partly by better exports and production

"Consumer spending was dragged down by bad weather. Exports slowed because of weaker global demand for cellphones after good growth at the end of last year. The decline in capital spending was a surprise and that's probably because companies were cautious as exports weakened," the economist added.

Measured quarter-on-quarter, Japan's GDP shrank 0.2 per cent.

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A version of this article appeared in the print edition of The Straits Times on May 17, 2018, with the headline 'Japan's economy shrinks in Q1 after two-year run of growth'. Print Edition | Subscribe