In the first quarter of 2018, Japan's economy recorded its first contraction in over two years. That slowdown assumes more significance as the global economic outlook worsens. Developments ranging from international trade tensions to domestic political developments and timelines spurred International Monetary Fund Managing Director Christine Lagarde to warn that "clouds on the horizon" are "getting darker by the day." Policymakers must begin preparing for a downturn that appears ever more likely.
The IMF projects 3.9 percent global growth for 2018 and 2019, the fastest pace since 2011, but growth will weaken afterward. In its analysis, the World Bank echoes that assessment, and warns of "considerable downside risks" that threaten to upend projections. Despite low inflation, unemployment at the lowest level in over two decades and high corporate profits, the World Bank projects the Japanese economy will grow 1.0 percent in 2018, a drop of 0.3 percentage points from its January estimate, and growth will further slow to 0.8 percent in 2019 and 0.5 percent in 2020.
Japan's prospects have been hurt by rising oil prices, a labor market that is at virtually full employment, and a consumption tax increase that will take effect next year. Even more worrisome are external developments that could shock the global economy and drag Japan down with it.