Japan's novelty shops respond to the latest GDP shock.
Photograph by Yoshikazu Tsuno — AFP/Getty Images
By Reuters and Fortune Editors
February 15, 2016

Japan’s economy shrank more than expected in the final quarter of last year as consumer spending and exports slumped, adding to headaches for policymakers already wary of damage the financial market rout could inflict on a fragile recovery.

Gross domestic product contracted by 1.4 percent on the year in October-December, bigger than a market forecast for a 1.2% decline and matching a fall marked in the second quarter of last year, Cabinet Office data showed on Monday. It followed an upwardly revised 1.3% increase in the previous quarter.

The data underscores the challenges premier Shinzo Abe faces in dragging the world’s third-largest economy out of stagnation, as exports fail to gain enough momentum to make up for soft domestic demand.

Abe sought to reassure markets that Tokyo is ready to stem excessive market volatility that could undermine the wealth effect delivered by his stimulus policies. The yen had risen by 7% against the dollar in the first half of February, nullifying the Bank of Japan’s efforts to ease monetary conditions by cutting interest rates below zero for the first time.

“As we have agreed at G7 and G20, sudden currency moves are undesirable,” Abe told parliament Monday. “I want the finance minister to closely monitor the situation and respond with appropriate measures as needed.”

“It’s a matter of time before the BOJ and the government will take additional stimulus measures,” said Junko Nishioka, chief economist at Sumitomo Mitsui Banking, predicting the central bank will ease policy again as early as next month.

Japan’s benchmark stock index, the Nikkei 225, responded to Abe’s comments by surging 7.2%. That’s its second best day since 2009, but the index is still down 16% since the start of the year, an indication of the extreme volatility of the first seven weeks of 2016.

 

With his stimulus policies that gave big manufacturers windfall profits, Abe had hoped to generate a positive cycle in which companies raise wages and help boost household spending.

Instead the data showed that private consumption, which makes up 60% of GDP, fell 0.8%, exceeding market forecasts of a 0.6% decline.

Since Abe took power three years ago, private consumption has shrunk by roughly 1.5 trillion yen to 306.5 trillion yen ($2.7 trillion), while overall growth has averaged less than 0.7%, compared to a 1.8% under the previous Democratic Party government.

Offering some hope for policymakers, capital expenditure rose 1.4% percent, far better than the predicted 0.2% decrease.

But analysts doubt whether the economy will gain momentum in coming months, with the recent market turbulence and slowing Chinese growth clouding the outlook for corporate profits.

 

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