The Japanese economy faces several challenges, from negative GDP growth to weak domestic demand.
The Japanese economy contracted less than previously measured in the January-March period, but still left the East-Asian country into recession. The economic recession hit Japan in last year’s Q4, causing the country to drop to the fourth spot as the world’s richest country, behind Germany.
Japan’s Gross Domestic Product contracted by 1.8% annually in the first quarter of 2024. Previous estimates measured a 2% fall and Reuters-polled economists forecast a 1.9% revised decline.
Nevertheless, Japan’s sinking economy will likely cause problems for Prime Minister Fumio Kushida and Bank of Japan’s governor Kazuo Ueda.
Private consumption, an indicator measuring 50% of the Japanese economy, fell by 0.7%, unchanged from the initial estimate. Exports of goods and services dropped by 5.1% annually, impacted by a New Year’s earthquake in the Tokyo area and a major scandal hitting the domestic car industry.
These two events will likely impact growth in the current quarter, possibly postponing Japan’s economic rebound. “The data confirmed weakness in consumption. A breakdown shows spending on durable goods was weak, which I think reflected the impact of the Daihatsu problem on auto purchases,” economist at Daiwa Securities Toru Suehiro said.
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One of many problems
The revised data came at a difficult time for the Bank of Japan. In March, the BoJ abandoned its year-long strategy of ultra-low interest rates, which were kept at -0.1% since 2007. Interest rates in Japan now sit at 0.1%.
Inflation in Japan has been steadily on the rise for the past few years, sitting at 2% in April. Core inflation, a value that excludes volatile goods like food and energy, came in at 2.2% after a 2.6% measurement in March.
The BoJ kept interest rates negative for years in an effort to stimulate a stagnating economy. Seeing as the strategy failed, with inflation also back on the rise, the BoJ abandoned this strategy.
Moreover, the BoJ is facing a value crisis for the yen, currently at a record-low exchange rate with the US dollar. This exchange rate crisis is making Japanese goods less competitive while weakening domestic demand, which in turn lowers GDP growth.
“It’s difficult for the BOJ to raise interest rates significantly, given the current weakness of domestic demand,” said Shumpei Goto, a researcher at the Japan Research Institute. “On the other hand, the weak yen has pushed up prices of food and non-durable goods, which in turn has reduced consumer spending, so there is a possibility the BOJ will slightly alter its course,” Shumpei added. Analysts now predict a new hike next October.
Japan’s economic hurdles made Fumio Kushida one of the least popular Japanese Prime Ministers in history. Kushida is up for re-election as head of his party in September, with polls showing his support declined to 21%, the lowest since he took office in 2021.
