Japan’s economy shrank less than expected in the first quarter. Here’s why that’s bad news

The contraction in Japan’s economy occurred more quickly than expected in the first quarter, data showed on Friday, raising the risk that the country will continue to be buffeted by headwinds as it exits…

Japan’s economy shrank less than expected in the first quarter. Here’s why that’s bad news

The contraction in Japan’s economy occurred more quickly than expected in the first quarter, data showed on Friday, raising the risk that the country will continue to be buffeted by headwinds as it exits a mild recession last year.

Gross domestic product unexpectedly fell 0.8 percent in the January-March period, compared with the median forecast for a 0.3 percent increase in a Reuters poll of economists. GDP shrank 0.6 percent in the previous quarter.

The economy also shrank at a higher-than-expected pace, highlighting Japan’s fragile recovery. Growth has remained below 2 percent in three of the past four quarters.

The decline was concentrated in the capital spending sector and weak consumer spending, while both exports and imports fell, the data showed.

“The economy is slowing down significantly. If you add up all the components of GDP, there is a lot of downward pressure,” said Shuji Tonouchi, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

“Weakness in the economy is starting to take its toll on financial markets.”

The dip in GDP raised the chance that the economy had contracted in the fourth quarter, due to uncertainty on the effects of Japan’s planned sales tax hike in October.

Friday’s data also means the economy will be expanding by a moderate pace this year, according to economists polled by Reuters, reversing a contraction of 0.2 percent in the previous quarter.

The decline in GDP also raised concerns that Japan’s sharp slowdown in overseas demand could last longer than earlier thought. The government has forecast export growth of 1.3 percent in 2018.

Japan’s economy contracted 0.3 percent in the fourth quarter of 2017, marking its first-ever recession and raising market doubts about the Bank of Japan’s inflation target of 2 percent.

The data on Friday also underlined that the economy is vulnerable to external shocks, as sentiment surveys have recently weakened.

External demand subtracted 1.4 percentage points from GDP in the first quarter, more than double the 0.7 percentage point hit in the previous quarter.

The Office of Budget Management, which publishes the GDP data, revised up GDP in April-June and revised its year-to-date reading in April to the fastest growth in five years.

The BOJ on Thursday kept its stimulus intact, but lowered its inflation projection and upgraded its view on the economy for the first time in a year.

BOJ policymakers are now more confident that the economy’s solid performance will sustain output growth even after a sales tax hike next month, but are far from shifting policy away from crisis-mode measures to jumpstart inflation.

Takahide Kiuchi, an economist at Nomura Securities, said any signs of weakness in private consumption could prompt the BOJ to ease its monetary stimulus.

“It would take a downward revision of GDP, or a significant deterioration in outlook for consumer prices to prompt the BOJ to consider additional easing,” he said.

© Reuters 2018

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