Consumer Spending Drives Japan’s Economic Growth in Q1

Solid consumer demand and higher government spending helped offset weak business investment

Japan’s economy hailed in the New Year with rebound in the first quarter of 2016 on the back of healthy consumer demand and higher government spending. The world’s third-largest economy grew by an annualized rate of 1.7% in the January-March 2016 period, higher than a median market forecast of a 0.2% growth. The Q1 growth marks a rebound from a 1.7% contraction in the previous quarter, according to Reuters and Japanese Cabinet Office data as on Wednesday, May 18th 2016.

Japan’s economy grew at the fastest pace in a year in Q1, partly due to a leap year consumption boost. However, analysts feel that the growth during Q1 is not robust enough to avert a contraction in growth in Q2 2016 since private consumption made only a feeble recovery from last quarter’s slump. That said, the rebound in Q1 could pave the way for Prime Minister Shinzo Abe to delay a sales tax hike next year and roll out additional fiscal stimulus worth at least 5 trillion yen ($45.76 billion). The Bank of Japan is also expected to ease its policy further in July 2016, given the weak growth and tepid inflation, analysts said.

Boost from private consumption

During the quarter, private consumption, which accounts for 60% of GDP, rose 0.5%, more than double the median market forecast, as households boosted spending on televisions, food & beverage, and recreation, the data indicated. However, the growth in Q1 failed to make up for a 0.8% drop in the previous quarter.

Japan’s economy contracted in the final quarter of last year as slow wage growth hurt private consumption, while exports fell due to sluggish emerging market demand and the appreciating yen. In 2014, Abe raised the sales tax to 8% from 5%, which pulled the economy into recession. With mild growth witnessed during Q1, analysts feel that Abe is likely to delay a second tax hike to 10% by 18 months.

Putting the brake on falling prices

Japan has not been effectively able to break the vicious cycle of falling prices and stagnating incomes. This situation may pull Japan into deflation, which has afflicted the country on and off since the late 1990s. Robust increases in borrowing and spending, and a sustained rise in prices, have been elusive. This is because the recent rise in the value of the yen combined with higher oil prices has raised costs for businesses. These two factors have also cut into profits of exporters, making them unwilling to raise wages. All these factors together have made deflation harder to beat. To add to these woes, consumers have curtailed spending and are maintaining a wary future outlook.

Steadying the labor force

Prime Minister Shinzo Abe has another important task on hand which is to increase the dwindling labor force. Government data has predicted that the labor force could collapse by 40% by 2060. As part of his efforts to get 1.17 million more people into the workforce by the fiscal year starting April 2020, the government has drafted a plan to tackle the nation’s aging labor force by increasing the number of women and elderly workers. Higher minimum wages and the provision of more care for children and the elderly are some of the key elements of this plan.

Source: Bloomberg and OECD
Source: Bloomberg and OECD

While the labor force is currently steady at around 65 million, the government has projected a 40% fall in labor force by 2060, if it fails to avert the current pitfalls. The Japanese government will also raise minimum wages by 3% a year and the national weighted average to 1,000 yen ($9.15); a move expected to revive the economy by increasing spending.

Source: Government data and Bloomberg
Source: Government data and Bloomberg

More women working

After Abe came to power, the number of women joining the workforce has risen to around 50% from 47% percent in January 2013. Women are perceived as key to boosting Japan’s economy. To this end, the government is targeting to have female workers in 30% of supervisory positions in all fields by 2020.

Source: Government and Bloomberg
Source: Government and Bloomberg

With these plans in place, the government hopes that the faltering progress will ultimately make way towards a sustained recovery in the years to come.

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