Business / Economy

Japan's economy shrinks as consumption, investment fall

Bloomberg

Japan’s economy contracted last quarter as consumers and businesses cut spending, putting pressure on Prime Minister Shinzo Abe to return his focus to his economic policies, dubbed “Abenomics.”

Gross domestic product fell an annualized 1.6 percent from January-March, ending two quarters of growth, the Cabinet Office said Monday. The median estimate in a Bloomberg survey was for a 1.8 percent drop.

The slump in the world’s third-biggest economy is a setback for Abe, whose support has suffered as he has championed unpopular defense bills and the restart of nuclear reactors. Bank of Japan Gov. Haruhiko Kuroda is counting on weakness to fade this quarter as he chases an elusive 2 percent inflation target with unprecedented monetary stimulus.

“A contraction would cause huge damage to Abe’s popularity,” Kazuhiko Ogata, an economist at Credit Agricole SA, said before the report. “Abe has had support because he’d improved the economy. It’s possible that he compiles an economic package.”

Abe made reviving the economy a priority when he took office in December 2012, advocating reflationary policies that weakened the yen and spurred corporate profits. His effort to increase long-term growth prospects — the “third arrow” of his Abenomics program — have “slowed to a crawl,” say economists Marcel Thieliant and Mark Williams at Capital Economics.

Monday’s data underscore weakness in private-sector demand, with consumers struggling to cope with last year’s sales-tax hike and pay that has not kept pace with rising living costs.

The economy is flashing warnings that the weakness could persist. Consumer confidence fell in July to the lowest in six months. Inventories climbed to the highest since 2009 in June, pressuring manufacturers to curtail production.

The stumble comes as China — Japan’s biggest trading partner — is fighting off its own slowdown, with a currency devaluation last week that triggered convulsions in global markets and adds to challenges for Japanese officials in reflating the economy.

Sumitomo Metal Mining Co., Japan’s biggest nickel producer, this month cut its profit forecast as slower Chinese demand weakens commodity prices.

Abe faces a party leadership election next month amid declining public support. More people disapproved of his Cabinet than approved in July, for the first time since his premiership in 2012, according to public broadcaster NHK.

Kuroda said last month he does not think Japan’s slowdown will continue from July, and earlier this month said recent weakness in industrial production and exports will be temporary.

Japan “need not worry” about China’s currency devaluation of the yuan because it can always offset the effects by easing monetary policy, said Koichi Hamada, an adviser to Abe.

Economists surveyed before Monday’s data did not foresee a strong bounce. The economy will grow 2 percent from July to September, according to the median estimate of economists.

“Government and BOJ officials are likely to emphasize growth rates should be averaged out,”said Yoshiki Shinke, an economist at Dai-ichi Life Research Institute. “Even so, economic data show that it’s getting difficult to say Japan is recovering now.”