Japan’s economic growth set to restart after speed bump

Growth is forecast to resume in the current quarter as global trade and Japanese exports regain traction

By BLOOMBERG

TOKYO • Japan’s first economic contraction in two years is expected to be only a speed bump on the road to further, yet slower growth.

The economy shrank in the first quarter (1Q) at an annualised rate of 0.6% due to capital investment unexpectedly falling 0.1% and flat private consumption.

Growth is forecast to resume in the current quarter as global trade and Japanese exports regain traction. “This will not be a turning point — but is temporary,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

Still, the drop-off offers a reminder of the challenge facing the Bank of Japan as it continues its long-running efforts to achieve 2% inflation.

Domestic demand remains soft after the two-year expansion, even accounting for temporary factors that weighed in the 1Q of this year, including unusually poor weather.

“Ideally, we should be headed toward an economic expansion led by domestic demand, supported especially by consumption,” said Atsushi Takeda, an economist at Itochu Corp. “Unless we have that, it’s difficult to see a world where Japan’s escaped deflation.”

Japan’s economy had expanded at well above its potential growth rate for a year, as a strong expansion of exports fuelled production and investment, helping to raise wages and inflationary pressures.

The tightest labour market in decades is expected to keep adding upward pressure on wages. An initial reading for March showing the biggest rise in two decades spurred hopes that wage gains may finally accelerate and support robust consumption.

Yet, higher commodity prices are already cutting into slowly improving paychecks.

Toshimitsu Motegi, Japan’s economy minister, pointed to higher vegetable prices as one factor in the 1Q contraction.

“Capital expenditure should return, but consumption is still weak, and consumers aren’t in a situation where they can loosen their purse strings,” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities Inc.

Japanese exports to a growing global economy will remain key. The International Monetary Fund has forecast global growth of 3.9% this year, the fastest pace since 2011.

Goldman Sachs economists, led by Jan Hatzius, are even more optimistic, saying this month they are looking for a 4.1% expansion.

“The economy still looks fairly healthy after two years of expansion, and the outlook is for a rebound in 2Q, supported by stronger production and exports, as well as faster wage gains,” Bloomberg Economics’ Yuki Masujima said.

Industrial production is projected to rise 3.1% in April from March, and fall 1.6% in May, according to the Ministry of Economy, Trade and Industry.