Japan fourth-quarter growth, external balance suffer blow in test for Abenomics

12-Mar-2014 Intellasia | Reuters | 6:00 AM Print This Post

Japan’s economic recovery suffered a blow at the end of last year and the current account deficit ballooned to a record in January, raising fears of a stumble in the world’s third-largest economy as activity wilts ahead of a sales tax increase in April.

In the fourth quarter of last year, Japan’s economy grew at an annual rate of just 0.7 percent, revised figures show, slower than the initial estimate of 1.0 percent on weaker business investment and consumption. The slowdown from a revised 0.9 percent pace in the previous three months bolsters expectations that the Bank of Japan may ease monetary policy further in coming months to safeguard a fragile recovery.

In a further negative sign for the export-reliant economy, the current account deficit widened to a record 1.589 trillion yen ($15.38 billion), easily exceeding a median estimate for a 1.4 trillion yen deficit as shipments failed to substantially pick up despite a weaker yen.

The disappointing data join a recent run of soft indicators that have raised doubts about prime minister Shinzo Abe’s strategy to spark sustainable growth through massive monetary and fiscal stimulus, as well as structural reforms.

“Abenomics” helped the economy grow above an annual clip of 4 percent in the first half of last year – the best among advanced economies – but growth slowed to below 1 percent in the second half as exports, capital spending and private consumption lagged.

Monday’s data come as the BOJ kicked off a two-day policy review and amid growing expectations the central bank will further ease policy as early as next month to steer the economy through some speed bumps.

While the BOJ is expected to stand pat on Tuesday, analysts say policy makers will be concerned about the soft exports ahead of a planned increase in the sales tax to 8 percent from the current 5 percent on April 1.

“The fact that growth slowed sharply marks a failure of Abenomics that depends on the weak yen and the BOJ easing. But (the policies) have neither raised Japan’s growth trend nor improved its current account,” said Hiromichi Shirakawa, chief economist at Credit Suisse in Tokyo.

“The BOJ may have no choice but to ease policy further by increasing risk asset purchases as early as in April, depending on market moves. It could justify such a move by reasoning that this fiscal year’s GDP is likely to undershoot its projection.”

Economists polled by Reuters last month expected the BOJ to ease policy further by this summer to shore up the economy as the effects from Abenomics begin to fade.

The central bank launched a massive burst of stimulus in April 2013 to defeat 15 years of chronic deflation and jump-start a long-stagnant economy, pledging to increase base money at an annual pace of 60-70 trillion yen ($590-$690 billion).


The economy is expected to perk up this current quarter as consumers frontload purchases before the tax hike, but some analysts worry that underlying growth is not robust and that more steps to bolster activity may be necessary.

“There are signs that the underlying trend for private consumption is not that strong. There are still a lot of doubts about the economy after the tax increase,” said Norio Miyagawa, senior economist at Mizuho Securities Research & Consulting Co.

The current account data showed exports rose 16.7 percent in January from a year earlier, much slower than a 30.3 percent annual increase in imports.

More worryingly, and giving credence to the argument that a weak yen alone is not a panacea for Japanese exports, shipments volume fell 0.2 percent in the year to January, according to the finance ministry’s trade data.

GDP grew 0.2 percent in the October-December period before annualising the rate, down from a preliminary 0.3 percent, the Cabinet Office data showed.

Capital spending rose 0.8 percent, less than the initial reading of 1.3 percent. Private consumption rose 0.4 percent, slower than the preliminary 0.5 percent.

BOJ officials have said they expect a recovery in exports to offset some of the volatility caused by the sales tax hike, but chronic trade deficits cast doubt on this scenario.

Both the government and the BOJ have put on a brave face in recent months, indicating that they are prepared to look past temporary speed bumps. While the BOJ sees consumer prices on track to meet its 2 percent inflation goal, analysts doubt it can be hit by around early 2015 as expected by the bank, given lackluster demand and that effects of a weak yen taper off later this year.

Also clouding Japan’s outlook are concerns about the seizure by Russian forces of the Crimea region of Ukraine and sluggish exports to Asian countries.

For now, analysts see growth accelerating this quarter as consumers rush to buy before the planned sales tax hike. That scenario looked likely to play out as Japan’s industrial output and consumer spending rose sharply in January, according to recent data.

Most economists expect gross domestic product to shrink rapidly in the second quarter as consumer spending falls and then rebound in the third quarter.



Category: Japan

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