The economy shrank by an annual rate of 0.6 percent in the first quarter of 2018 as consumers kept their purse strings tight despite signs that paychecks are finally beginning to rise after decades of flat wages.
Cabinet Office data released Friday confirmed that a two-year run of economic growth had at least temporarily run aground, with household spending contracting by 0.1 percent in the first quarter of 2018, a downward revision from preliminary data which showed no change.
“The main factor behind the contracting consumption is due to surging prices earlier in the year, which appears to be only a temporary headwind,” said Marcel Thieliant, a senior Japan economist with Capital Economics.
Harsh winter weather led to a spike in fresh food prices in January, contributing to weaker purchasing power for many households. But this factor appears to be fading through the second quarter of the year and fresh food prices declined during the February-April period.
“If you look at income from households they are growing at levels not seen since the 1990s, so consumers have the ability to spend more,” Thieliant said, adding that he expects consumption to recover on the back of strong wage and employment growth.
Nominal wages were up 0.8 percent in April, rising for the ninth straight month, according to data released by the labor ministry Wednesday. However, when accounting for inflation, real wages saw no change from the previous month.
Despite a slowdown in consumer spending, which represents around 60 percent of economic activity, the first quarter downturn is unlikely to shift government policy.
“The negative growth comes after eight straight quarters of positive economic growth … so we think the economy is still modestly recovering,” economy minister Toshimitsu Motegi told a group of reporters Friday.
Friday’s numbers showed that companies were at least willing to spend money during the first three months of the year as business investment grew by 0.3 percent quarter over quarter, an upward revision from the 0.1 percent decline seen in preliminary data.
Meanwhile, export demand remained relatively strong, growing 0.6 percent on a quarterly basis, while domestic demand dropped by 0.2 percent. But Japan’s reliance on exports may be perilous going forward as Group of Seven tensions heat up over U.S. President Donald Trump’s recent imposition of steel and aluminum tariffs.