(Bloomberg) — Japan’s economy shrank in the first three months of this year as a soaring import bill and the hit from omicron pushed its pandemic recovery into reverse, offering some support for the Bank of Japan’s view that stimulus should continue for now.
Gross domestic product contracted at an annualized pace of 1% in the quarter through March, the Cabinet Office reported Wednesday. Economists had expected a decline of 1.8%.
The setback to Japan’s already sluggish recovery from the pandemic stemmed from the deterioration in overall trade as import prices surged, exacerbated by the war in Ukraine and a plunge in the yen to two-decade lows. The monthly trade balance has been in the red since August after supply-chain snarls and returning global demand started pushing up commodity prices.
Consumer spending also stalled as quasi-emergency curbs cut business hours and restricted activity during the record virus wave, though it showed more resilience than expected. A downward revision to the previous quarter’s growth also helped reduce the size of the economy’s slide.
Still, the fourth quarterly contraction of the pandemic leaves Japan lagging behind its global peers in regaining lost ground, bolstering the case for continued government and central bank stimulus while inflation remains far below global levels.
“It’s hard to be optimistic about the outlook of Japan’s economy now,” said Yoshiki Shinke, senior executive economist at Dai-Ichi Life Research Institute. Businesses will be cautious about investing in an uncertain environment without a clear driver of growth, he added.
“What this means is that from the perspective of the economy, the BOJ is not at a point where it can start to normalize policy,” Shinke said.
BOJ Governor Haruhiko Kuroda has repeatedly argued that the central bank must keep its interest rate settings unchanged to support the fragile recovery. That stance has left Japan as an outlier on policy as the Federal Reserve and other monetary authorities race to raise their borrowing costs to tackle inflation.
The resulting divergence has contributed to the sharp slide in the yen that is exacerbating pressure on the economy by amplifying the impact of soaring energy and commodity import prices. Cost pressures for companies rose at a double-digit pace for the first time since 1980 in April, intensifying pressure on firms to pass on higher costs to consumers.
Japan’s benchmark inflation gauge is forecast to jump toward 2% in a report due on Friday as the higher energy costs feed into prices and the effect of cheap mobile phone fees fades out.
What Bloomberg Economics Says…
“The good news for Japan is that GDP shrank much less than expected in 1Q. The bad news is that the 2Q rebound is now likely to be much smaller.”
— Yuki Masujima, economist
For the full report, click here.
Prime Minister Fumio Kishida has already taken some steps to try to ease the pain of surging prices and keep the recovery on track with measures announced at the end of April and funded by an extra budget unveiled Tuesday. The government’s move gives the BOJ some cover to continue with its stimulus of the economy for the time being.
China’s slowdown induced by its strict virus lockdowns also clouds the prospects for a robust recovery as it weighs on global trade and renews pressure on supply chains.
Still, if the economy can gain traction as the year progresses and inflation sticks around the 2% level targeted by the BOJ, the logic for the central bank to continue with rock-bottom interest rates might become harder to sustain, especially if the yen keeps weakening.
The economy should at least regain its pre-Covid level in the second quarter if consumption and business investment strengthen, according to Mari Iwashita, chief market economist at Daiwa Securities Co.
“The third quarter will be the key for the Japanese economy,” she said. “If it can keep growing with an expansion in consumer spending that will enable it to finally leave the pandemic behind and get back on a solid recovery path.”
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