Japan’s economy contracted in the first quarter

Japan’s economy contracted in the first quarter

Japan’s economy contracted in the first quarter, weighed down by weaker consumption and external demand and presented new challenges to policymakers as the central bank sought to raise interest rates from near-zero levels.

Preliminary gross domestic product (GDP) data from the Cabinet Office on Thursday showed Japan’s economy shrank an annualized 2.0% in January to March from the previous quarter, faster than the 1.5% decline seen in a Reuters poll of economists. Downward-revised data showed GDP barely grew in the fourth quarter.

That reading translated to a quarterly contraction of 0.5%, compared to the 0.4% decline expected by economists.

Private consumption, which accounts for more than half of Japan’s economy, fell 0.7%, larger than forecasts for a 0.2% decline. It was the fourth consecutive quarter of decline, the longest streak since 2009.

“Japan’s economy hit an all-time low in the first quarter,” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities. “The economy is certain to recover this quarter thanks to rising wages even as uncertainty remains on the use of services.”

Capital spending, the main driver of private demand, fell 0.8% in the first quarter, compared to expectations for a 0.7% decline, despite strong corporate income.

External demand, or exports minus imports, slipped 0.3 percentage points from the first-quarter GDP estimate.

Policymakers expect wage increases and income tax cuts starting in June to help spur sluggish consumption.

The boost to growth from this year’s earthquake in the Noto area and the suspension of operations at Daihatsu Toyota’s (TM) unit is also expected to fade.

However, a sharp decline in the yen to levels not seen since 1990 has fueled concerns about higher living costs, squeezing consumption.

The Bank of Japan (BOJ) raised interest rates in March for the first time since 2007, in a significant shift away from negative rates, but the central bank is expected to slow down in a soft-money environment given the fragile economy.

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