Now for the slide into negative growth in Japan this quarter, and beyond that, into a recession?
Certainly Japan is heading for a quarter of no growth in the three months to June simply because of the drag forward impact on demand from the rise in the country’s consumption tax on April 1.
Consensus market forecasts say the country will see a dip in GDP of around 3.3% annual in the June quarter, followed by a rebound of 2% (annual) in the September quarter. That will still mean negative growth for the first half of the year.
That’s why many market forecasts have the economy growing by 0.7% in the year to March 2015 (the Japanese financial year) instead of the 1.1% rate forecast by the central bank.
But a few forecasters are not that sanguine and say there’s a strong chance growth could be slow to a small negative reading in the September quarter.
The big danger is that the slowdown in demand and activity drags down the inflation rate towards the deflationary level that existed up to late last year.
No wonder the Tokyo stockmarket is negative for the year so far – down around 12%, compared with 2013’s big gains.
Weak corporate profit forecasts for 2014-15, especially from the country’s banks (three of whom have forecast big falls in earnings), haven’t helped confidence and tell us that business doesn’t see a solid year in front of them.
So the big question for Japan and its trading partners, such as Australia, is whether it’s a one quarter hit, or worse – a replay of the period after the 1997 hike.
That saw a prolonged period of economic sluggishness, which helped prick the sharemarket boom in 1999 and ushered in the two decades and more of little or no growth and debilitating deflation.
So given the pull forward of demand ahead of the tax rise, the first estimate of Japanese March economic growth was predictably strong as consumers and business spent heavily ahead of the April 1 rise in the country’s consumption tax from 5% to 8%.
So, as a result, gross domestic product (GDP) grew an annualised 5.9%, the Cabinet Office said yesterday.
That was much stronger than the 4.2% rate forecast by the market.
Quarter on quarter growth was up 1.5%, beating forecasts for a 1% growth rate.
The growth rate for the 2013-14 financial year was a moderate 2.8%.
The December quarter’s growth rate was cut in half to 0.1% from the 0.2%.
Consumer spending rose at the fastest pace since the quarter before the 1997 tax increase, while capital spending jumped the most since the aftermath of the 2011 earthquake.
Consumer spending jumped 2.1% from the March quarter, from 0.4% in the three months to December.
Business investment surged 4.9% in the quarter from the December quarter, when business spending was revised up to 1.4% from the originally reported 0.8%.
But perhaps the most telling reading was the latest consumer confidence survey for April showing a reading of 37, the lowest since August 2011, and down from 37.5 in March, before the tax rise.
A fall in confidence had been expected, but it does illustrate the task ahead for Japanese policymaker to boost domestic consumption, not business investment.
That’s because exports, Japan’s traditional growth driver, are no longer the key – the big future generator of economic growth in Japan will be finding a way to boost household consumption.
In fact foreign trade has been working against Japan during the latest recovery.
Despite the weaker yen precipitated by Mr Abe’s policies, exporters are not shipping many more cars, electronics and other goods abroad, while the cost of imports has soared.
Thursday’s GDP report showed the net effect of trade – the value of exports minus imports – reduced first-quarter growth by 0.3 percentage point. (or well over 1.1% annualised).
More importantly, Japan’s annual export growth peaked at 18.6% last October, according to trade figures, but fell 1.8% in March (the latest month).
Shipments to the rest of Asia, half of the total, were up just 1.4% in March as the weaker yen has failed to stimulate demand or encourage exporters to lift volumes.
And that’s the key problem for exporters.
Export volumes fell 2.5% in March, showing that the yen’s slide, driven by 12 months of the Bank of Japan’s quantitative easing policies, has not given the country’s exporters and their products the competitive edge they once would have.
That is the key failing of the plan by Japanese Prime Minister Abe (nicknamed ‘ Abenomics’) to try and force Japan to break free of the deflationary rut it had been in for most of two decades and more since 1999.
We have already had a hint of what will happen to growth this quarter in the April car sales figures, which, not unexpectedly, fell.
They showed that car sales fell 5.5% in April, from the same month in 2013 April’s sales were the lowest level since December 2012. The Japan Automobile Dealers Association and Japan Mini Vehicle Association has forecast a record 16% slide in car sales for the year to next March.
That has been supported by weak profit and sales forecasts from big car companies such as Toyota.
Japanese car sales had risen in the seven months to April, culminating in a record of more than 783,000 vehicles being sold in March, the highest monthly tally in eight years. That compares to the 343,226 vehicles sold in April, a significant fall.
Industrial production, retail sales, inflation and employment data at the end of the month will tell us how the economy travelled in April, with the production and retailing figures especially important.
To boost growth after the tax shock, Japan needs more than just a lot more exports and business investment because the country already is over invested in the corporate sector with too many factories and not enough domestic and foreign demand.
A sustained period of reasonable inflation and rising wages and salaries will help boost domestic demand, and hopefully sustain the rise in inflation.
But that’s looking difficult as inflation refuses to meet expectations of higher levels, except for energy which is being caused by the rise in LNG, oil and coal imports to meet the shortfall from the closure of the country’s 54 nuclear power plants after the March 2011 tsunami and Fukuskima nuclear disaster.
