Japan’s GDP shrinks as consumers hold back

Japanese consumers continued to taper off in 2017, and in the last quarter the economy shrank. But there is light at the end of the tunnel as Japan’s currency, the yen, and public spending…

Japan’s GDP shrinks as consumers hold back

Japanese consumers continued to taper off in 2017, and in the last quarter the economy shrank. But there is light at the end of the tunnel as Japan’s currency, the yen, and public spending rise. Rising inflation suggests that this will be good news for consumers, and an end to deflation.

Japan’s GDP shrank an annualised 0.2% in the last quarter of 2017, following a 0.1% contraction in the previous quarter. For the full year, GDP grew 0.2%, following a 0.7% decline in 2016. That marked the second-worst annual contraction since a global financial crisis burst in 2007-08, and the fourth-worst since official records began in 1955.

But the Japanese economy is starting to look set to hit its anticipated 2018 growth of 1%. The latest regional PMI surveys from Dai-ichi Life Insurance Group suggest growth is stronger than previously thought.

The grim fourth quarter was due mostly to a slide in private consumption, which fell 0.2% in the fourth quarter on an annualised basis. This follows a 2.1% decline in the third quarter. These are not the biggest drops in a quarter for two decades, which suggests there may be a brighter future ahead for consumers.

Japanese consumer spending has been lagging behind the US, the eurozone and China, as well as recent economic data from Europe and emerging markets. Consumers’ worries about rising inflation are turning up the heat on their wallets. These are already among the highest since records began.

Higher wages are providing at least some financial relief. They rose 1.7% in the first half of the year, only slightly less than inflation. But this masks the fact that prices have been rising at a faster pace.

A rise in tax rate to 10% from 5% on 1 April is widely expected to be followed by a further hike to 10.5% in the fiscal year beginning in April 2019. A rise in inflation to 1.5% from 0.7% is widely expected, paving the way for faster wage growth.

The latest public spending from the finance ministry has also contributed to increasing expenditure in Japan. The government plans to spend more than ¥5tn (£33bn) to keep transport projects on track.

Total spending has not hit economists’ projections, which were made before Donald Trump called off his planned G7 meeting with Japan. This leads to the conclusion that more government spending is needed to avoid a trade war with the US.

The bulk of public spending has been allocated to infrastructure projects, which will help kickstart economic growth. Labour productivity, or how much workers produce, has held back Japan for many years. A greater focus on national productivity will also raise living standards for workers. There is a rising consensus among economists that increased public spending in Japan will ultimately benefit all of society.

Japan’s economy grew 0.3% quarter-on-quarter in the fourth quarter, with the economy expanding 0.2% on an annualised basis. This added to quarterly economic growth of 0.6% in the third quarter and 1.2% in the second quarter.

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