Japan Economy Contracts in Q1: Sluggish Demand, Rising Prices

Bangkok, Jul 1 (AP) Japan revised its earlier estimates to show that its economy contracted at a 2.9 per cent annual pace in the first quarter of the year, as meanwhile a survey by the central bank released Monday showed conditions remain sluggish.

Analysts had expected the downward revision in the GDP data for January-March and said it was mainly based on a change in data on construction activity. The earlier estimate was of a 1.8 per cent contraction in annual terms.

The quarterly survey by the Bank of Japan showed a modest improvement in business sentiment among large and medium-size manufacturers. But details of the survey showed weakness in demand both in Japan and overseas.

“Across all industries and firm sizes, business conditions held steady at 12, which is on past form consistent with (quarterly) GDP growth of around 0 per cent,” Marcel Thieliant of Capital Economics said in assessing the tankan.

“A renewed slowdown in GDP growth this quarter would be consistent with the slump in industrial production firms were predicting for June,” he said.

A resumption of normal production among automakers after they had slowed factory lines due to shortages of computer chips last year was one factor behind the slight improvement in overall manufacturing sentiment, economists at ING Economics said.

The major highlight of the government's downward revision for growth early this year was that public investment contracted at a 1.9 per cent rate. Earlier, it was estimated to have grown 3 per cent. Private residential, or housing, fell 2.9 per cent instead of the earlier estimate of a 2.5 per cent contraction.

Japan's economy grew at a 0.1 per cent annual pace in the last quarter of the year, just barely avoiding two consecutive quarters of contraction, or a technical recession. It expanded at a 1.8 per cent annual rate in full-year 2023.

Weakness of the Japanese yen against the US dollar has benefited exporters, who see their profits earned overseas inflated in yen terms when they are brought back home. But it also has sharply increased costs for the many commodities and products Japan imports, especially of oil and gas.

While the Federal Reserve in the US has kept interest rates high to try to tame inflation that flared during the pandemic, Japan's central bank has kept its benchmark rate near zero to keep credit cheap in hopes of spurring more spending and investment.

But price increases have outstripped increases in Japanese workers' earning power, keeping demand relatively weak and sapping growth in an economy largely driven by consumer demand.

The latest data showed household spending falling in the first quarter of the year, in inflation-adjusted real terms. (AP)