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Japan’s GDP shrinks

Reuters . Tokyo
19 May 2022 00:00:00 | Update: 19 May 2022 06:35:07
Japan’s GDP shrinks
Businessmen wearing protective face masks walk on a pedestrian bridge in Tokyo, Japan – Reuters Photo

Japan’s economy shrank for the first time in two quarters in the January-March period as Covid-19 curbs hit the service sector and surging commodity prices created new pressures, raising concerns about a protracted downturn.

The decline presents a challenge for Prime Minister Fumio Kishida’s drive to achieve growth and wealth distribution under his “new capitalism” agenda, stoking fears of stagflation - a mix of tepid growth and rising inflation.

The world’s No. 3 economy fell at an annualised rate of 1.0per cent in January-March from the previous quarter, gross domestic product (GDP) figures showed, slower than a 1.8per cent contraction expected by economists. That translated into a quarterly drop of 0.2per cent, the Cabinet Office data showed, versus market forecasts for a 0.4per cent drop.

The weak reading may pressure Kishida to release even more stimulus with upper house elections pencilled in for July 10, following the 2.7 trillion yen ($20.86 billion) in extra budget spending compiled on Tuesday.

“The economy will return to growth in the coming quarters but it won’t be a dramatic recovery, leaving the possibility of further spending wide open as elections draw near,” said Hiroshi Shiraishi, senior economist at BNP Paribas Securities.

“The lockdown in China and U.S. rate hikes as well as the Ukraine crisis could weigh on external demand. Declines in household and corporate real income due to worsening terms of trade may hamper recovery in domestic demand.”

Private consumption, which makes up more than half of the economy, was little changed, the data showed, better than a 0.5per cent fall expected by economists but below the upwardly revised 2.5per cent growth seen in the December quarter.

Many analysts expect Japan’s economy to rebound in coming quarters, helped by easing coronavirus curbs. However, doubts remain over whether the recovery will be V-shaped, with surging energy and food prices boosted capping consumption.

Adding to the gloom, business optimism among Japan’s manufacturers hit a more than one-year low as firms struggled with rising import costs due to a weak yen and higher raw material prices, the Reuters Tankan poll showed.

Yen pressures

Japan’s export-reliant economy got little help from external demand, with net exports knocking 0.4 percentage point off GDP growth, a tad larger than the negative contribution of 0.3 percentage point seen by economists. The weak yen and surging global commodity prices helped imports of goods and services including cellphone and medicine grow 3.4per cent, overwhelming export growth of 1.1per cent.

Capital spending rose 0.5per cent versus an expected 0.7per cent increase and following a 0.4per cent rise in the previous quarter, driven by general-purpose machinery and research and development payments. That helped domestic demand contribute 0.2 of a percentage point to GDP growth.

For the whole of fiscal 2021 to March, the economy grew 2.1per cent, posting the first gain in three years. Economy minister Daishiro Yamagiwa said the economy has not returned to pre-pandemic levels but that further downside would likely be limited.

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