Japan’s GDP shrinks as rising spending raises fears of a deep recession

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TOKYO – Japan’s economy contracted for the first time in two quarters between January and March as Kovid-19 sanctions hit the services sector and rising commodity prices put new pressure, raising concerns about a prolonged recession.

This fall presents a challenge for Prime Minister Fumio Kishidar’s drive to achieve growth and wealth distribution under his “new capitalism” agenda, raising fears of stagnation – a combination of sluggish growth and rising inflation.

The world’s No. 3 economy contracted at an annual rate of 1.0% year-on-year in January-March from the last quarter, the Gross Domestic Product (GDP) data showed, slower than the 1.8% contraction expected by economists. This translates into a quarterly drop of 0.2%, according to Cabinet Office data, the market forecast for a 0.4% decline.

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Following 2.7 trillion yen ($ 20.86 billion) in additional budget spending compiled on Tuesday, the weak reading could force Kishida to show even more excitement with the upper house election for July 10.

“The economy will return to growth in the coming quarters, but it will not be a dramatic recovery. With the election approaching, there will be more open spending,” said Hiroshi Shiraishi, a senior economist at BNP Paribas Securities.

“In addition to increasing lockdown rates in China and the United States, the Ukraine crisis could weigh on external demand. The decline in family and corporate real incomes due to growing trade conditions may hinder the recovery of domestic demand. ”

Personal spending, which makes up more than half of the economy, changed slightly, the data shows, better than the 0.5% fall expected by economists but below the upward revised 2.5% growth seen in the December quarter.

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Many analysts hope that Japan’s economy will recover in the coming quarters, helping to facilitate coronavirus control.

However, doubts remain as to whether the recovery will be V-shaped, with increasing energy and food prices increasing capping costs.

According to a Reuters Tankan survey, business optimism among Japanese manufacturers has fallen to more than a year low due to the weak yen and rising raw material prices, as well as rising import costs.

Yen pressure

Japan’s export-dependent economy has received little help from external demand, with net exports down 0.4 percentage points from GDP growth, slightly larger than the negative contribution of 0.3 percent seen by economists.

Weak yen and rising global commodity prices helped boost imports of goods and services, including cellphones and medicines, by 3.4%, with irresistible export growth of 1.1%.

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Capital expenditures rose 0.5% in contrast to an expected 0.7% increase and 0.4% growth in the previous quarter, driven by general-purpose instruments and research and development providers. This helped domestic demand contribute 0.2 percentage points to GDP growth.

For the full 2021 fiscal year to March, the economy grew 2.1%, posting the first profit in three years.

Economy Minister Daishiro Yamaguiwa says the economy has not returned to pre-epidemic levels, but worse will probably be limited.

Tom Larmouth, a Japanese economist at Capital Economics, wrote in a note: “We expect GDP growth to be disappointing throughout 2022 as high inflation and older consumers remain wary of contracting the virus.”

(1 = 129.4400 yen) (Reporting by Daniel Luisink and Tetsushi Kazimoto; Editing by Sam Holmes)