In a Surprise, Japans Economy Grew in the First Quarter, Despite a Slowdown in China – The New York Times

In a Surprise, Japan\s Economy Grew in the First Quarter, Despite a Slowdown in China - The New York Times

Japans Unexpected GDP Growth Comes With Reasons for Caution

TOKYO — Japan reported a surprising economic upswing in the first three months of the year, but the sunny figures belied continuing weaknesses that threaten the countrys prospects.

Japans economy, the third largest in the world behind the United States and China, grew at an annualized rate of 2.1 percent in the first quarter of 2019, according to data released on Monday by Japans Cabinet Office. Economists had expected the economy to shrink because of weakened demand from China as that economy slows.

By contrast, Ifos assessments of other economies improved for this quarter. The U.S. and Europe saw smaller negative readings in their expectations indexes, while China moved sharply toward the upturn quadrant. As the slowdown of Chinas economy reverberated around the world, the monetary policies of the U.S. and Europe have taken a dovish turn. Meanwhile, China has introduced massive economic stimulus measures.

A closer reading of the Japanese figures gave economists little reason to cheer. Private consumption and exports fell. Japans surprise performance stemmed in large part from a sharp drop in imports, which fell more dramatically than exports. That wider trade surplus enhanced Japans bottom line, even as it signaled that Japanese businesses and consumers are reluctant to spend.

Should Chinas stimulus take hold, concerns about a worsening Japanese economy may be washed away. Yet Japan is constrained not only in its monetary policy, but also in its fiscal leeway considering the heavy government debt load. The government faces the task of revitalizing the economy at a deeper level, including such measures as easing employment-related regulations and undertaking social security reforms.

As weak imports should signify weak domestic demand, it is definitely not a reason to rejoice, said Takuji Okubo, chief economist for Japan Macro Advisors, a research firm.

The surprise expansion comes despite an increasingly gloomy global outlook. China, a major contributor to global growth, has been hit by its trade war with the United States and by its efforts to contain its debt problems. Though China has taken steps to stimulate growth, further slowdowns could ripple through Asia and the rest of the world. Japanese companies across a wide range of industries, especially in sectors that supply unfinished components to Chinese manufacturers, have already made huge downward revisions to their earnings forecasts.

This is the second poor forecast for the countrys economy inside the past week. Japans Cabinet Office released a monthly assessment of business conditions on May 13 that described the environment as “worsening” for the first time in more than six years — and the first time since the earliest days of Abenomics, Prime Minister Shinzo Abes signature economic policy.

The report offers a mixed bag for the countrys prime minister, Shinzo Abe, who has made reinvigorating Japans economy a centerpiece of his appeal to voters. While the headline figure could give him political cover to push his policies past lawmakers, it does little to change Japans difficult position.

The divergence owes to a few factors. Japan — being geographically and economically closer to China than most — has been hit particularly hard by the downturn. Furthermore, Japans monetary policy is already very loose, making further easing difficult. The looming consumption tax hike in October also weighs on sentiment.

In terms of policy implications, the seemingly positive growth is unlikely to convince policymakers all is well, Mr. Okubo said.

For decades, Japan has been struggling to find its way out of the economic doldrums that began in the 1990s. Mr. Abe came to office in 2012 pledging to turn things around with a package of economic reforms, known as Abenomics. They included loose monetary policy, heavy government investment and reforms to sclerotic social and corporate structures that have suppressed the countrys economic performance.

Since then, Japan has largely experienced modest growth, except for a brief fall into recession in 2014 following an increase in the countrys consumption tax. But much of that success coincided with Chinas remarkable economic rise.

But a deeper issue than either of these is potential growth. This represents the underlying strength of an economy after looking beyond temporary fluctuations, and is affected by such factors as population trends and technological innovation.

Japanese voters are increasingly concerned about the countrys economy, said Tobias Harris, a Japan analyst at the New York-based political consulting firm Teneo Intelligence, adding that the new data suggest that there is something to the pessimism that has been captured both by government surveys and by leading indicators.

TOKYO — Japans economy is on course for a major downturn as demand from China ebbs, according to a survey of international economists, underscoring Tokyos continued failure to improve the countrys stubbornly low potential growth rate.

He has committed to once again increasing the countrys consumption tax in October, this time to 10 percent from 8 percent. He says the increase is necessary to pay down the countrys huge debt and fund social programs that are expanding as the countrys population ages. Japans debt ratio is the highest among developed nations at roughly two and a half times the countrys annual economic output.

The U.S. and Germany are believed to have potential growth rates of nearly 2% a year, while the Cabinet Office estimates Japans at about 1%. This means that the Japanese economy is more vulnerable if external demand dries up.

Mr. Abe has already delayed the tax raise twice. His insistence on sticking to the October deadline has drawn condemnation from across the political spectrum, including from members of his own party, who argue that raising the tax now could push the country into recession.

The two Ifo indicators dropped below minus 10 together on four occasions in the 20 years before the launch of Abenomics. The economy proceeded to deteriorate in each case, bottoming out about a year later on average.

Nevertheless, the Abe administration has said it will take an economic shock on the scale of the 2008 financial crisis to derail its plans.

Speaking to reporters following the data release, Toshimitsu Motegi, the minister in charge of carrying out Japans economic policies, focused on the positive, saying that we believe the trends in demand have not deteriorated.

Though Mondays report was mixed, the strong headline figure may also open some space for Mr. Abe in his negotiations with the United States over a trade deal between the two countries.

President Trump has frequently complained about the trade deficit between the United States and Japan and is using the threat of auto tariffs as leverage in trade negotiations with Tokyo that kicked off in Washington last month.

Mr. Trump arrives in Tokyo on Saturday to meet Japans new emperor, Naruhito. During the visit, he is expected to talk trade with Mr. Abe. Both sides have said they hope to come to an agreement quickly.

But with Japanese upper house elections coming in July, Mr. Abe may be leery of making any concessions to the American president that could be seen as potentially damaging Japans economic situation.

The U.S.-China trade war is likely imposing costs on Japan and will continue to do so, Mr. Harris said. But Im not expecting that theres much Abe could say to convince Trump to change course.

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