Japan’s economy suffers worse-than-expected 0.5% contraction in Q1

TOKYO - Japan’s economy contracted by a worse-than-expected 0.5 per cent in the first three months of the year, official government data showed on May 16.

Gross domestic product (GDP) in the world’s fourth-biggest economy was expected to have shrunk by only 0.3 per cent from the previous quarter, according to economist forecasts.

Compared with the first quarter of 2023, GDP fell 2 per cent compared with a forecasted drop of 1.2 per cent.

Japan has been flirting with recession since 2023, with zero growth – revised on May 16 from an expansion of 0.1 per cent – between October and December.

In the previous quarter, from July to September, GDP suffered a major contraction of 0.9 per cent, also revised on May 16 from an earlier reading of minus 0.8 per cent.

A technical recession is generally defined as two successive quarters of falling GDP.

Japan, which was overtaken by Germany as the world’s No. 3 economy in 2023, has battled for decades stagnant growth and deflation.

Inflation, however, has been picking up, allowing the Bank of Japan (BOJ) in March to raise interest rates for the first time in 17 years. In April, the BOJ kept rates on hold.

The BOJ has been a global outlier in sticking to an ultra-loose monetary policy while other central banks pushed rates up as they fought against surging inflation.

The resulting wide differential has added to pressure on the yen, which in recent weeks has hit three-decade lows against the US dollar.

In late April and early May, the yen briefly rose sharply against the greenback, prompting speculation the Japanese government had intervened in the market. Tokyo declined to comment on whether it had done so.

The weak yen has created a two-speed economy in Japan, with the export and tourism sectors broadly benefiting from a more competitive exchange rate, but households and small businesses squeezed by inflated costs of imported goods.

Daiwa Securities chief economist Toru Suehiro said the yen’s weakness complicates the question of whether the BOJ should maintain its monetary stimulus or continue to unwind it.

“The adverse effects of a weaker yen are becoming a cause for concern, so one can argue that interest rates should be raised,” Mr Suehiro said.

“Although real wages are likely to turn slightly positive in the second half of this year, the level of real wages will not rise sharply as the yen continues to weaken.”

Japan’s large businesses delivered the biggest wage hikes in three decades in 2024, which the BOJ says provided the conditions needed to finally end decades of radical monetary stimulus.

However, thrifty households have since tightened their purse strings as price hikes outpaced wage gains, squeezing real incomes and diminishing their purchasing power.

Private consumption, which accounts for more than half of the Japanese economy, fell 0.7 per cent, bigger than the forecast 0.2 per cent drop. It was the fourth straight quarter of decline, the longest streak since 2009.

Economists are hopeful the first quarter weakness will prove temporary, and they expect the drag on growth from an earthquake in the Noto area in 2024 and the suspension of operations at Toyota’s Daihatsu unit to dissipate.

Still, sharp yen declines persist as a threat to the recovery as do spikes in crude oil due to the Middle East crisis.

Capital spending, a key driver of private demand, fell 0.8 per cent in the first quarter, versus an expected decline of 0.7 per cent, despite hefty corporate earnings.

External demand, or exports minus imports, knocked 0.3 of a percentage point off first-quarter GDP estimates.

For now, policymakers are counting on the bumper pay hikes and planned income tax cuts to spur flagging consumption and prevent a shift back to deflation.

“Rate hikes or cuts in bond purchases can ease the pain of yen weakening, which could pave the way for income gains to spill over to consumption,” said SMBC Nikko Securities chief market economist Yoshimasa Maruyama. “If that doesn’t happen, raising rates would be difficult, particularly when consumption remains weak.” REUTERS, AFP