Drop in consumer spending and knock-on effect of Eurozone crisis may trigger further easing of monetary policy
Japan’s economy grew at a slower-than-expected annualised rate of 1.4% in April-June, adding to worries over the global outlook, as consumer spending flagged following an earlier rebound from last year’s earthquake and tsunami.
The Eurozone crisis also took a heavy toll as feeble demand hit Japan’s export sector.
Although the pace of growth dropped sharply from a revised 5.5% in the previous quarter, the economics minister, Motohisa Furukawa, struck an upbeat tone, saying in a statement that the economy “continues in an uptrend, led by domestic demand”.
The fact that the economy expanded, on top of the robust growth for the previous quarter, was a positive sign, said Junko Nishioka, an economist at RBS Japan Securities.
She said government subsidies for purchases of energy-efficient vehicles were still helping to support growth. The economy would also be buttressed by strong public investment, which is due to peak in October-December.
However, Nishioka said the risk of worsening deflation was a “pessimistic result” that might prompt Japan’s central bank to consider further easing of monetary policy to support growth. Deflation, or falling prices, is a chronic problem for Japan and can be a drag on economic growth.
Consumer spending makes up more than half of Japan’s economic activity. After the 11 March disaster last year, many Japanese held back on spending and excursions, adding to damage from disruption to manufacturing after many automotive and electronics plants ground to a halt in north-eastern Japan.
Robust public investment in reconstruction of housing and other buildings in the devastated region is likely to wane in coming months, further reducing momentum.
Meanwhile, the strong Japanese yen has clobbered exports, and costs for importing fuel to offset lost generation capacity from closed nuclear power plants have mounted.
Japan’s economy grew 0.3% in the quarter ending in June, from 1% in January-March. That was lower than economists’ forecasts of more than 2%, and translates to a 1.4% expansion in annualised terms.
The latest growth marks a fourth straight quarter of growth, although still at fragile rates. The economy was virtually flat in October-December but did not shrink.