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Last updated: February 17, 2014 12:53 pm
Japan’s economy failed to regain momentum in the last three months of 2013 as growth reached just a third of the level economists had forecast, raising questions about the durability of the country’s “Abenomics” recovery.
Gross domestic product expanded at an annualised rate of 1 per cent in the quarter, the Cabinet Office said in a preliminary estimate on Monday. External trade was the weak point: a softer yen has done little to spur more exports even as it has sharply increased the cost of imported energy, helping turn Japan’s once vaunted trade surpluses into large and growing deficits.
With trade no longer the engine of growth it was, the domestic spending that is supporting the economy will soon face a headwind of its own, with an increase in Japan’s national sales tax in April likely to hurt consumption.
“Growth in October-December was totally dependent on domestic demand,” said Takuji Aida, an economist at Société Générale.
The world’s third-largest economy had been expected to shake off a midyear slowdown and expand at a rate of around 3 per cent, putting it close to the heady pace it achieved in the first half of 2013 after Shinzo Abe, the prime minister, swept to office on a pledge to stimulate growth.
Instead, Monday’s data showed the more tentative growth trend was unchanged from July-September.
Consumers are expected to continue supporting growth in the current quarter, before the three percentage-point tax rise takes effect. The looming increase, the first since 1997, is encouraging some to make big purchases and creating a temporary extra burst of economic activity, but a slowdown is predicted after April’s move.
How big that slowdown turns out to be, and how quickly the economy can recover, will be crucial to the future of Abenomics, say economists.
Monday’s data showed that home purchases – a focus of the pre-tax-rise rush – were up 4.2 per cent from the previous quarter. Consumer spending increased 0.5 per cent, capital investment by companies rose by 1.3 per cent and government spending also increased, though at a slower pace than in the previous period.
But a small increase in the value of exports, at 0.4 per cent, was not nearly enough to offset a 3.5 per cent surge in imports, leaving trade as a net negative for the economy.
Many in Japan have seen a weak yen as an economic cure-all, and the currency’s decline of more than 20 per cent has indeed boosted profits at global manufacturing groups such as Toyota. But it has done so mainly by increasing margins on goods that companies sell overseas – and, increasingly, produce there too – while having relatively little effect on export volumes.
Creeping doubts over Abenomics have helped to send Japanese stocks down 12 per cent this year, though data from the US Commodity Futures Trading Commission indicate that some hedge funds are once again placing heavy bets on the Nikkei, possibly on the expectation that the Bank of Japan will step in with additional monetary stimulus.
The worse than expected GDP data could well draw calls for the central bank, which began a two-day policy meeting on Monday, to loosen its already highly accommodative policy, though most analysts said they do not expect it to respond immediately. Rather, it is likely to wait to gauge the impact of the tax rise on consumption and consumer prices.
“The output gap itself continues to narrow. This, in turn, underpins CPI inflation,” said Kyohei Morita, an analyst at Barclays. “In this context, we expect the BoJ to leave its economic assessment and monetary policy itself intact.”
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