At the start of the year, Japan looked as if it had already emerged from a decade-long slump. Booming stock markets, rising wages and the first rise in interest rates in 17 years have investors and economists arguing that Asia’s economy has finally turned the corner.
However, weak growth is testing that optimism. On Thursday, Japan’s cabinet released preliminary estimates of GDP growth. announcing that the country’s economy contracted by 2% year on year in the first three months of 2024. This marks the third consecutive quarter of flat to negative growth for the country’s economy.
Japanese officials blamed temporary shocks due to a worse-than-expected downturn such as supply disruptions in the auto sector. Late last year, Daihatsu, the Toyota-owned automaker, suspended production after discovering inaccuracies in decades of testing data. Company only completely resumed production last week.
But economists believe the downturn may be caused by something deeper than a supply shock.
“The biggest concern is private consumption,” said Stefan Angric, an economist at Moody’s Analytics. Wall Street Journal. Household consumption decreased by 0.7% compared to the previous quarter.
Business spending is also weak, falling 0.8% quarter-on-quarter, suggesting “the private sector recovery is still on a weak footing,” HSBC economists Jun Takazawa and Frederic Neumann wrote in a research note on Thursday.
Stagflation?
Prices in Japan rose 3.2% last year, the highest since 1982. Inflation has since fallen but is still rising faster than incomes. Real wages have fallen for two years in a row, meaning “households understandably continued to rein in their spending” last quarter, HSBC’s Takazawa and Neumann wrote.
The combination of weak economic growth and rising prices raises the specter of stagflation. “There is virtually no growth and inflation is high,” said Taro Saito, head of economic research at the NLI Research Institute. Bloomberg.
Slow growth makes it difficult to know whether or when the Bank of Japan will raise interest rates again to bring inflation under control. “It’s not at all a situation where they can immediately raise interest rates again,” said Nobuyasu Atago, chief economist at Rakuten Securities Economic Research Institute. Bloomberg.
The Bank of Japan raised interest rates in mid-March to 0-0.1%, ending the last remaining negative interest rate regime among major economies. Central banks praised successful wage negotiations in which Japanese unions won biggest salary increase for more than 30 years for their decision to raise rates.
If Japan decides to delay raising interest rates, it could create another problem: a weak yen.
The Japanese yen fell to a record low as the country’s interest rates remain far lower than those offered by the United States. A weak currency makes exports cheaper and imports more expensive; this is good for export-oriented sectors such as tourism and auto manufacturing, but harms households and industries that rely on imported inputs.
Japanese companies are starting to worry about consequences persistently weak yen. The country’s largest restaurant companies are now building more restaurants overseas as they try to escape a weak yen, according to the company. Nikkei Asia.
The yen may even be weighing on Japanese stock markets, which topped bubble-era records earlier this year. Bloomberg notes that in dollar terms, the Nikkei 225 lags behind the S&P 500 and Hong Kong’s Hang Seng Index.