A 1.7 % quarterly Japan GDP rise complicates Abe effort to boost economy
The first quarter growth that Japan registered on May 18, 2016 was bad news for policy makers seeking looser fiscal policy: It decreased the political imperative for a big stimulus package while not signalling any sustained recovery.
While gross domestic product rose 1.7 % on an annualized basis, economists cautioned against concluding that a recovery was under way. They said the result was helped by a downward revision on the previous quarter and an extra leap year day in February that inflated consumer spending.
The growth comes as Prime Minister Shinzo Abe is considering both a big stimulus package and a delay to a sales-tax increase to jolt the Japanese economy from years of sluggishness, his advisers say. Months of weak economic data, including contractions in two of the previous three quarters, had fuelled those expectations.
The new GDP result complicates both those moves because it gives fuel to Japan’s deficit hawks to argue against them, said Toru Suehiro, an economist at Mizuho Securities, even though “growth is not as strong as it may appear.”
Under Mr. Abe, who took office in late 2012, Japanese policy makers have tried to convince consumers and business to spend by pumping cash into the economy through central bank asset purchases, stronger public spending and other strategies. That, they hoped, would create a “virtual cycle” of spending. That hasn’t consistently worked.
Many economists blame an earlier rise in the sales tax in 2014 for driving that plan off track and pushing the economy into recession. Consumer spending has yet to fully recover.
The planned tax increases are part of efforts to safeguard Japan’s social security system and reduce the government’s debt burden, which is among the world’s biggest. Mr. Abe has already delayed the second tax increase once, vowing that it would go ahead next year unless there is an economic shock on par with the global financial crisis.
Local media have reported that Mr. Abe has already decided to delay the tax increase. The prime minister and other senior officials have denied that.
Economy Minister Nobuteru Ishihara said on May 18, 2016 that the economy was expected to continue recovering gradually as the job market and wages improve. “It is my job to create an economic environment that will allow a sales-tax increase to take place according to the plan,” he said.
Mr. Abe is also considering a fiscal stimulus package to be rolled out later this year. Etsuro Honda, a close adviser, called for a JPY10 trillion (USD 91 billion) spending package in an interview last month. He said Abenomics had reached a “new phase” in which monetary policy would carry a lesser burden.
Mr. Suehiro said the economy was likely to stall again in the second quarter due to a slowdown in China, renewed strength in the yen and the impact of big earthquakes in southern Japan last month.
Growth in the first quarter was lifted by unexpectedly strong household spending and government demand, rising 0.5 % and 0.7 % on quarter, respectively. But economists at BNP Paribas said in a note that without the extra day in February, private consumption would have been flat, leaving public demand as the driver of growth.
But business spending remained weak. Companies cut investment 1.4% compared with the previous three months. That was the first decline in three quarters. Economists say businesses have held back on capital spending due to uncertainty about overseas economies.
The GDP data was “an encouraging report for the consumer, but [there is] plenty of policy work to do to stimulate business investment,” said Jesper Koll, CEO of asset manager WisdomTree Japan.
Japanese companies have also seen their profits sink because of a stronger yen, at the same time that the slowdowns in China and other emerging markets have hit demand for their exports, ranging from steel to display screens for smartphones.
Economists at SMBC Nikko Securities said the currency’s gains pose a further risk to business sentiment. “We await a response in fiscal and monetary policy,” they said in a note.
The yen’s gains during the first quarter have heightened expectations that the Bank of Japan will undertake additional monetary easing in an effort to weaken the currency and stoke inflation.
Officials in Tokyo have also warned in recent weeks that the government would act to stop excessive gains in the currency.
Koichi Hamada, a Yale University emeritus professor and adviser to Mr. Abe, said Japan could face a strong backlash from the U.S. if it tries to weaken the yen through intervention.
“To intervene without giving diplomatic relations due consideration would be unwise,” Mr. Hamada told The Wall Street Journal.
His remarks followed open clashes between Japan’s Finance Ministry and the U.S. Treasury Department over yen policy.
Japan will play host to a Group of Seven summit at the end of May. Economists say it will provide Mr. Abe an opportunity to reveal policy steps meant to revive confidence in his economic program.