Japan’s lesser economic slippage signals a rebound in consumption

Japan’s economy contracted less than expected earlier this year as revised figures showed consumer spending held up in the first quarter of the year even as the country suffered its worst pandemic outbreak. nowadays.

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(Bloomberg) – Japan’s economy contracted less than initially expected at the start of this year as revised figures showed consumer spending held up in the first quarter of the year even as the country suffered from its worst pandemic outbreak to date.

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Gross domestic product fell an annualized 0.5% in the three months to March, updated Cabinet Office figures showed on Wednesday. Consumption continued to grow in the quarter despite a series of omicron-related restrictions on business hours for much of the period.

While the smaller contraction signals the start of a recovery in consumption that is expected to continue through this quarter, it still leaves the Japanese economy below its pre-pandemic size, a factor that should prompt the government and the Bank of Japan to continue supporting the recovery. .

The result compares to the decline estimated by economists at 1.1% and an initial reading of -1%. An inventory revision was the most important factor in reducing the decline, although it indicates a buildup of unsold goods and materials that could weigh on growth this quarter.

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While the release of pent-up demand after the lifting of virus curbs should help fuel a rebound this quarter, economists are also signaling the risk that the recovery will be limited by soaring inflated energy and food prices. by a yen that renewed to two-decade lows on Tuesday.

The continued fallout from Russia’s war on Ukraine and China’s slowdown are other sources of concern.

Read more: Falling currencies give Japan another chance to revive

“Consumption has picked up somewhat, but inflation will weigh on it because I don’t think people are becoming tolerant of price hikes,” said economist Takeshi Minami of the Norinchukin Research Institute. “I think the recovery will be modest in the second quarter. We will see the impact of China’s lockdowns on exports.

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Consumer prices excluding fresh food rose 2.1% in April from a year earlier, the fastest pace since 2008 after excluding the effects of higher taxes. Although this is still much lower than the growth in prices in most other major economies, the costs of fuel, energy and some daily necessities are rising at a much faster rate and are squeezing household and business budgets. businesses.

Unlike other major central banks, however, the BOJ under Governor Haruhiko Kuroda is sticking to its monetary stimulus to support growth rather than fight inflation, a factor contributing to yen weakness. To help households and businesses weather inflation, Kishida unveiled a package of spending measures in April.

Data released on Tuesday showed that pent-up demand still outweighed worries about inflation’s impact on falling real incomes in April, supporting the consensus view that the economy is rebounding this quarter. But analysts warn that once that demand is exhausted, price gains could chill consumption if wage gains fail to keep up with the rising cost of living.

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What Bloomberg Economics says…

“A pile-up of inventories was the main reason for the revision – and that suggests a slowdown in production ahead as companies work with unsold goods.”

— Yuki Masujima, Economist

For the full report, click here.

The decline in the yen also complicates the outlook. The weaker currency has already contributed to a higher import bill in the first quarter, leading to net trade that weighed on the economy. Further declines in the Japanese currency are expected to amplify import costs even further this quarter and with the impact of China’s shutdowns expected to weigh on exports, trading conditions do not look so favorable for the current period.

Capital spending was also revised down sharply after a report released last week showed companies invested at a slower pace in the first three months of the year. This indicates that business confidence in the outlook is weaker than expected, another factor that suggests this quarter’s rebound may be tepid at best.

(Adds more details from the release.)

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