Japan’s GDP shrank for the first time in two quarters due to rising spending

Japan’s economy contracted for the first time in two quarters in the first three months of the year as Kovid-19 sanctions hit the services sector and rising commodity prices created 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, which raises 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.

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. As the election draws closer, there is a possibility of more massive spending,” said Hiroshi Shiraishi, a senior economist at BNP Paribas Securities.

“China and the US could raise rates as well as the lockdown of the Ukraine crisis on external demand. The deteriorating state of trade and the decline in real family and corporate incomes could hamper the recovery of domestic demand.”

Personal spending, which makes up more than half of the economy, has declined slightly, in contrast to the 0.5% fall expected by economists, the data show.

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

However, there are doubts as to whether the recovery will be V-shaped with rising strength and rising food prices due to weak yen capping costs.

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 have boosted imports, with irresistible export gains.

After a 0.4% increase in the previous quarter, capital spending rose 0.5% in contrast to an expected 0.7% increase.

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 being infected with the virus.”