Japan's GDP shrinks as surging costs raise spectre of deeper downturn

TOKYO (Reuters) -Japan’s economy shrank for the first time in two quarters in the first three months of the year as COVID-19 curbs hit the service sector and surging commodity prices created new pressures, raising concerns about a protracted downturn.

FILE PHOTO: Businessmen wearing protective face masks walk on a pedestrian bridge, amid the spread of the coronavirus disease (COVID-19), in a business district in Tokyo, Japan June 24, 2020. REUTERS/Issei Kato

The decline presents a challenge to 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 shrank at an annualised rate of 1.0% in January-March from the previous quarter, gross domestic product (GDP) figures showed, slower than a 1.8% contraction expected by economists. That translated into a quarterly drop of 0.2%, the Cabinet Office data showed, versus market forecasts for a 0.4% 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, slightly fell, versus a 0.5% fall expected by economists, the data showed.

Many analysts expect Japan’s economy to rebound in coming quarters, helped by easing coronavirus curbs.

However, doubts remain over whether recovery will be V-shaped, with surging energy and food prices boosted by the weak yen capping consumption.

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 inflated imports, overwhelming export gains.

Capital spending rose 0.5% versus an expected 0.7% increase, following a 0.4% increase in the previous quarter.

“We expect GDP growth to disappoint across 2022 due to the hit to household income from higher inflation and signs that elderly consumers remain wary of catching the virus,” Tom Learmouth, Japan economist at Capital Economics, wrote in a note.

($1 = 129.4400 yen)

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