Japan’s economy shrinks on weak consumer spending, auto woes

The Japanese economy shrank at an annual rate of two per cent in the first quarter of this year, as consumption and exports declined, the government said Thursday.

Although unemployment has stayed relatively low in the world’s fourth largest economy at about 2.6 per cent, wage growth has been slow and prices have risen partly due to weakness of the yen against the US dollar.

Quarter-to-quarter, the preliminary seasonally adjusted gross domestic product, or GDP, a measure of the value of a nation’s products and services, slipped 0.5 per cent in the January-March period, according to the Cabinet Office.

The annual rate measures what would have happened if the quarterly rate lasted a year.

The Japanese yen has been trading at three-decade lows recently, with the US dollar costing about ¥155. That has helped tourism but hurts spending power, especially for a nation that imports almost all its energy.

The latest results were generally worse than what analysts had forecast. Sluggish consumer spending is a big problem since private consumption accounts for half of Japanese economic activity.

Also denting growth were the problems at automaker Toyota Motor Corp’s subsidiary, although production is now back up. Earlier this year, the Japanese government ordered Daihatsu Motor Company to halt production of its entire lineup because of faked safety test results.

Robert Carnell, analyst at ING, noted the disruptions of car production and sales due to the safety scandal brought down overall growth, but that means they likely will bounce back later in the year.

“Monthly activity data already shows a gradual normalisation since March,” he said.

The latest data provides a challenge for Japan’s central bank on when to further raise interest rates, an action that’s expected to come sooner or later, possibly in July.

Policy makers are likely to proceed with more caution in a weak economy. The Bank of Japan raised interest rates earlier this year for the first time since 2007, but only to a range of zero to 0.1 per cent from minus 0.1 per cent.

AP