Poor Consumer Spending Leads to Weak Economic Growth in Japan

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on Aug 13, 2012

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Poor Consumer Spending Leads to Weak Economic Growth in Japan

Despite increased public investment for reconstruction of the disaster-stricken Tohoku region, Japan’s GDP grew by only 0.3 per cent in the second quarter. Weak exports and consumer spending slowed the economy and further deceleration is expected over the rest of the year. The Cabinet Office came out with preliminary data that indicated annualised growth of 1.4 per cent between April and June. This falls short by a large margin of the prognosis given by economists who were predicting an expected growth rate of 2.5 per cent.

Banks were quick to adjust their forecasts. Barclays Capital cut its third-quarter projection from 1.8 per cent to a real annualized 1.2 per cent. Mr. Kono from BNP Paribas expects the Japanese economy to shrink to 0.9 per cent in July-September, which will be followed by a modest 0.1 per cent increase in October-December, eroding gains made earlier in the year.

!m[](/uploads/story/241/thumbs/pic1_inline.png)Two main aspects were driving Japan’s higher growth in the first quarter – government spending directed towards rebuilding areas that were devastated by the March 2011 earthquake and incentives aimed at boosting sales of fuel-efficient vehicles. Tomohiko Sano, construction and property analyst at Barclays in Tokyo, said that since August 2011 public orders have exceeded equivalent levels from the previous year every single month. Not only in the Tohoku area but also in Osaka and Shizuoka, public projects have been set into motion with the purpose of reinforcing buildings to prevent damage from earthquakes. The largest portion of the spending went to decontamination projects and rubble clearance in Fukushima, Miyagi and Iwate, which were the prefectures that were hit hardest by the earthquake and tsunami.

The economic data, however, is weaker than expected. This demonstrates that private demand is still not strong enough to pick up the slack as public spending inevitably decreases. Private consumption increased by a disappointing 0.1 per cent, the weakest in five quarters. The government policy of subsidies for fuel-efficient vehicles, that stimulated the surprising 5.0 per cent rise in consumption in the first quarter, is due to expire in August. Analysts also attribute the low numbers to the unreasonably cold weather in April to June, which prevented large sales of summer goods. Expectations are that the results will balance out by the end of this year.

Net exports cut 0.1 percentage points from GDP and Motohisa Furukawa, Japan’s economy minister, warned that the government has to be prepared in case of further weakening of overseas economies. Fallouts from Europe’s troubles are affecting Japan and although few foresee a recession, the findings place additional pressure on the government and the central bank to do more to boost the economy. Consistently high growth is essential for Japan’s policy priority of raising taxes in order to settle its distressed public finances. Policy makers at the Bank of Japan will be expected to at least consider a monetary stimulus with the purpose of increasing domestic demand. Even the government may have to come up with a supplementary budget, which will not be an easy move to justify, taking into account last week’s parliamentary passage of legislation to raise Japan’s sales tax rate.