Japan’s economy contracts as consumption drops

Tokyo, Feb 15 (IANS) Japan’s economy contracted an annualised 1.4 percent in the October-December quarter, as sluggish exports and weak consumer spending weighed in the recording period, government data showed on Monday.

The contraction was more severe than economists had expected and translated to a 0.4 percent drop from Q3, which saw GDP increase 0.3 percent from the previous quarter, Xinhua reported.

While the government has been hoping that record business profits would lead to further investment and hence expenditure and also translate into increased earnings and an uptick in household spending, the 0.8 percent slide in consumption from the previous quarter, as the cabinet office’s figures showed, painted a gloomier picture.

Consumption drives Japan’s economy, accounting for around 60 percent of the nation’s GDP, and the figures showing an inclination towards households not spending, will be of concern to the government, as, in twine with an assumed weak yen and robust exports, Prime Minister Shinzo Abe’s “Abenomics” blend of economic policies, also assumes the government’s stimulus measures will have a direct bearing on spending.

Economics Minister Nobuteru Ishihara on Monday said the slump in consumer spending was due to unseasonably warm weather and stated that he believes the nation’s economic fundamentals to still be in order.

However, the government’s data on Monday showed business profits and stimulus measures are not making for a favourable employment market, with monthly wages charting a 0.9 percent decline in 2015, compared to a year earlier.

The latest annual decline marks the fourth successive year that real average monthly wages have posted a recession, despite the government’s upbeat rejoinders.

Chief Cabinet Secretary Yoshihide Suga, Abe’s top spokesperson, on Monday said there had been a continued improvement in the employment and income situation and that the government expects the economy to recover gradually.

But analysts have suggested that against a backdrop of currency fluctuations, a global oil glut and falling prices, as well as turmoil in financial sectors in Europe as well as the US, the outlook for the world’s largest economy is less than stellar, as “Abenomics” assumes demand for Japan’s exports, which lead the economy here, while a weak yen ensures the government’s margins stay favourable.

Owing to waning demand from both emerging and economies in Europe and the US, exports dropped 0.9 percent in the recording period, following 2.6 growth logged in the previous quarter, while domestic demand also diminishing is contributing to the unravelling of “Abenomics” as evidenced by the nation’s imports retreating 1.4 percent in the last quarter.

Economists have highlighted market volatility recently as pushing up the value of the yen against its major counterparts, as fears of a global economic downturn, or particular episodes of concern, such as financial institutions’ woes in Europe and the US, see investors flee from riskier assets like stocks and into safe havens like precious metals or the yen.

A firm yen sees export-linked companies’ profit outlooks diminish as typically the companies calculate their earnings based on the government favouring a weaker currency; with a weak yen seeing exporters’ overseas profits augmented on favourable exchange rates and demand boosted by relatively cheap prices in global markets.

Some analysts believe the Bank of Japan (BOJ) under the stewardship of governor Haruhiko Kuroda, may opt for further easing measures in light of the below par data on Monday, and as the bank looks unlikely to hit its inflation target of two percent in as many years.

The GDP deflator, a wider price gauge than the consumer price index, to this end, showed an increase of just 0.1 percent from the previous quarter, the government’s data showed.

Also clouding the outlook for the economy, is the looming 2017 consumption tax hike, the first round of which sent the economy here into recession. Some economists have suggested the government may be forced to delay the timing of the hike, till a sustainable recovery path has been quantified.

Compounding concerns for the health of the economy here, the data also revealed that private housing investment fell 1.2 percent in the recording period, marking the first retreat in four quarters, as public investment slumped 2.7 percent, marking the second straight quarter of decline.

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