Posted: 14 Feb 2016 06:40 PM PST
(TOKYO) — Japan’s economy contracted at a 1.4% annual pace in the last quarter as weak consumer demand and slower exports battered the recovery.
Despite the lackluster report, Tokyo’s main share index, the Nikkei 225, jumped 4.4% to 15,615.84 in early trading Monday, helped by a weakening in the Japanese yen.
The latest contraction, the second in 2015, adds to worries that Prime Minister Shinzo Abe’s strategy for reviving the economy through inflation fueled by massive monetary easing is not delivering as promised. The slowdown in China, one of Japan’s biggest export markets, has been a further hindrance.
Japan’s central bank has already resorted to imposing negative interest rates on some bank deposits it holds to help spur more lending, though cash-rich companies appear generally uninterested in borrowing.
Growth also has been stunted by slow increases in wages, which leave households less inclined to spend. Companies are still drawing down excess capacity built up during decades of fast growth, and have held back on domestic investments, viewing their shrinking and aging home market as less attractive than other faster growing economies in Southeast Asia and elsewhere.
Consumer demand fell more than expected in the last quarter, dipping to a four-year low, offsetting moderate growth in business investment, said Marcel Thieliant of Capital Economics. He expects consumer demand to perk up in coming months, in anticipation of a sales tax hike, to 10% from 8%, in April 2017.
“However, this should be short-lived, as activity will almost certainly slump once the tax has been raised,” Thieliant said. “The upshot is that the Bank of Japan still has plenty of work to do to boost price pressures.”
Despite the zigzags in growth last year, the economy eked out a 0.4% expansion in 2015, better than the flat-lining of 2014. But that pace of growth falls far short of the expansion needed to achieve Abe’s goal of a 600 trillion yen ($5.3 trillion) economy by 2020.
With the Japanese currency at a level of about 113.5 yen to the dollar, and some economists forecasting it could rise further as investors seek refuge from financial market volatility in a traditional “safe haven,” corporate profits will likely grow less than in recent years, adding to pressures on growth.
Abe has been maneuvering ahead of an election for the upper house of Japan’s parliament this summer. One possible tactic to reassure voters and boost support for his ruling Liberal Democrats would be to postpone, for a second time, the tax hike meant to help mend tattered public finances.
