Japan’s economy contracted by an annualised 0.6 per cent during the first quarter of 2018, ending the country’s longest run of growth since 1989 and dealing a fresh blow to Prime Minister Shinzo Abe.
The slowdown, which was the first contraction in the economy since 2015, was worse than analyst expectations of a 0.2 per cent decline in gross domestic product. It marks the end of an eight-quarter run of uninterrupted growth and suggests the global economic environment is becoming less favourable for Japan.
But analysts do not think the fall is the start of a recession. Japan’s labour market remains extremely tight, with an unemployment rate of just 2.5 per cent, and other economic indicators point to a steady expansion.
“It does certainly seem that export momentum has peaked out,” said Izumi Devalier, head of Japan economics at Merrill Lynch in Tokyo, speaking before the release of the GDP report. “We’re not expecting export contraction but you’re not really going to get as much push from export demand as you did in 2017.”
Details of the report showed a mediocre quarter but offered further evidence that a recession is not in prospect. Private consumption and investment were flat. Net exports contributed a modest 0.3 percentage points to growth, offset by a subtraction of 0.3 percentage points from residential investment.
“Residential investment continues to correct after the crackdown on apartment loans,” said Ms Devalier. The Financial Services Agency has forced banks to tighten standards on loans to private individuals for apartment construction after becoming concerned about the pace of credit growth.
The main cause of the unexpectedly weak GDP reading was a subtraction of 0.6 percentage points caused by companies running down inventories, after an inventory build-up in previous quarters.
Since inventories cannot grow or shrink forever, many analysts disregard them when looking at the underlying trend in the economy. A reading on final sales of domestic product, a measure of underlying demand at home, was flat in the first quarter compared with annualised growth of 0.1 per cent in the last quarter of 2017.
Although the figures do not suggest a recession, they do indicate Japan’s economy is coming off the boil, showing a fresh failure to shift from export demand to domestic consumption.
Ms Devalier said the weakness of consumption is tough to interpret. “If you just look at the fundamentals for consumption they’re really strong,” she said, with solid growth in worker incomes. Earlier in the year the weakness was blamed on bad weather but that explanation is becoming less plausible.
During five years of economic stimulus under Mr Abe, Japan has enjoyed steady growth, but struggled to break free of the deflationary mindset that set in as prices stagnated for two decades. Weaker economic growth will be of particular concern to Mr Abe as he wrestles with a series of scandals that threaten his government.
The initial report of Japan’s GDP is notoriously unreliable because it is based on limited source data. Large revisions are common with the second reading, which is due on June 8.