Japan’s economy sputters as dismal run extends to three quarters

Japan’s economy shrank in the first quarter as consumers and companies cut spending, underscoring the fragile nature of the recovery and extending a dismal performance stretching back to last summer.

• Also read: Why has the Japanese yen been so weak

Gross domestic product contracted at an annualised pace of 2% in the three months through March, the Cabinet Office said Thursday. Economists had forecast a contraction of 1.2%. Private consumption and capital spending both retreated, while net exports also dragged. Figures for the last quarter of 2023 were revised to show the economy flatlining, versus a previous reading of 0.4% growth.

The result reflects the negative impact of a New Year’s Day earthquake northwest of Tokyo and disruptions to auto production and sales, after a certification scandal blew up at Daihatsu Motor Co., a subsidiary of Toyota Motor Corp. 

While those factors can be discounted as one-offs, the continuing impact of the strongest inflation in generations is a more enduring problem. Household spending keeps falling as workers contending with persistent declines in real wages tighten their budgets. Personal consumption has now declined for four consecutive quarters, the longest stretch of retreats since the global financial crisis.

The weak results come with the Bank of Japan looking closely at data to determine when it should next raise interest rates after it conducted its first hike in 17 years in March. 

“The BOJ can’t ignore these GDP numbers. This is not at all the kind of situation where they can raise interest rates again right away,” said Nobuyasu Atago, chief economist at Rakuten Securities Economic Research Institute. “I don’t think they can move in July. They will have to wait for second quarter GDP data come out in August.”

Many economists expect the BOJ to move again later this year. They forecast an economic rebound in the quarter through June, as auto output recovers and the wage hikes lift consumer sentiment. Many families will also receive one-off tax cuts starting in June.

• Also read: Yen clings to sharp gains after suspected intervention, Fed in focus

What Bloomberg Economics Says ...

“Japan’s first-quarter GDP shrank more than the market expected due to one-off factors — and won’t dissuade the Bank of Japan from normalizing policy.”

— Taro Kimura, economist

While the first-quarter data painted a gloomy picture for the economy, there were positive developments as well. The first quarter saw companies emerge from annual negotiations with unions pledging the largest wage hikes in three decades. The prospect of higher pay eventually boosting consumption was a factor behind the BOJ’s decision to raise interest rates in March.

It remains to be seen if consumer spending will pick up strongly. Subsidies to cap rising utilities costs are set to end at the end of May, and the yen’s weakness is weighing on sentiment across a wide range of service industries.

Japanese authorities and business executives have voiced concerns over the currency’s weakness, which has put pressure on households and small companies by inflating costs for imported energy and other materials, even as exporters including Toyota post robust results.

The BOJ currently expects cost-push inflation to continue to ease and transition into demand-driven price rises. Governor Kazuo Ueda said the central bank would consider taking action if foreign exchange moves have a big impact on the inflation trend.

Recent sharp moves in the yen, after it slid to a fresh 34-year low against the dollar, suggest that finance ministry authorities intervened in the foreign exchange market to support it. Flows out of the BOJ’s accounts point to two likely interventions worth around ¥9.4 trillion ($60.8 billion).

A revision to the first quarter GDP figures is due on June 10, four days before the BOJ’s next policy decision, as speculation grows that the central bank may raise interest rates again in the coming months with the weak yen among the factors favoring an early move. 

• Also read: How Japanese intervention works to bolster a weak yen

The central bank meets again in July and is due to update its price and growth forecasts then, before authorities get a glimpse at preliminary GDP statistics for the second quarter on Aug 15.

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