New Economic Scuffle: In Japan, Demand Is Hard to Find

After Japan’s weak growth figures, investors and analysts are questioning whether the country can avoid its first recession in two decades. But the underlying demand in the world’s third-largest economy remains strong, allowing an…

New Economic Scuffle: In Japan, Demand Is Hard to Find

After Japan’s weak growth figures, investors and analysts are questioning whether the country can avoid its first recession in two decades. But the underlying demand in the world’s third-largest economy remains strong, allowing an unprecedented rescue operation to take root, including a plan to grow output by the biggest share of the population in four decades.

Gross domestic product contracted an annualized 3.3 percent in the first quarter, the first decline since the third quarter of 2016, the Cabinet Office said Friday. As things stand, the nation’s economy appears to be shrinking. Yet analysts see signs that it will rebound faster than previous estimates, especially since the labor shortage is on the decline and workers are turning to better-paying jobs, such as picking crops and running factories.

The slide was triggered by a drop in the value of the yen, which makes Japanese goods cheaper for U.S. consumers, and by a slowdown in investment. But a collapse in exports may be avoided by the budget plan approved by the government.

By investing 35 trillion yen ($342 billion) in labour-saving machinery and installing 700,000 robots over the next five years, the government aims to generate growth of 2.6 percent, compared with the 1.5 percent expansion it previously estimated. Japan will soon be operating at 89 percent of its potential.

“We are worried about weakening nominal gross domestic product because of this slowdown,” said Masanori Nishimura, a Goldman Sachs Group Inc. economist. “But the economy remains strong in light of improved sentiment and rising household spending.”

On Friday, Bank of Japan officials painted a rosier outlook for economic growth and inflation in Japan, saying consumer prices will gradually pick up and that businesses are facing increased competition because of weak corporate profitability and scant growth in the value of stocks and other assets. Japanese equities soared Friday, as the blue-chip Nikkei 225 Index gained 2.6 percent to 19,410.93.

Consumer price inflation fell to 0.1 percent in April, and the central bank is looking to build a bigger buffer to avoid deflation. But Japan’s central bank and policymakers on the global monetary-policy committee should resist rising pressure to ratchet up interest rates before inflation rears its head, said Naoki Fujiwara, chief fixed-income strategist at Shinkin Asset Management Co. in Tokyo.

Policy makers may announce steps to rein in their easing stance if inflation does not pick up, as some analysts including Bank of America Merrill Lynch’s chief economist in Japan, Izumi Devalier, predict.

Nonetheless, if the moves to boost wages and productivity are successful, Japan will enter a “golden age” of economic growth, a shift in fortunes that most nations would be lucky to see, Mr. Fujiwara said.

“I’m quite positive on the economy,” Mr. Fujiwara said. “This period of weakness in economic growth will be temporary.”

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