Japan's Economy Contracts in Fourth Quarter

Feb. 15, 2016

Japan’s economy shrank at an annualised rate of 1.4% in the last quarter of 2015, new figures showed on Monday, dealing a further blow to prime minister Shinzo Abe's stimulus policies.

Abe's economic policy - Abenomics - is based on three arrows:

  • The monetary arrow: expansion of the money supply to combat deflation
  • The fiscal arrow: increased government spending to stimulate demand in the economy
  • The structural arrow: structural reforms to make the economy more productive and competitive

Analysts say Japan needs to ensure exports grow in order to support future economic growth - for every 1% that Japan's economy grows, between 0.5 and 0.7% comes from exports. The country also relies heavily on domestic consumption but its population is ageing and shrinking so fewer people are contributing to the economy. The slowdown in China, one of Japan’s biggest export markets, has been a further hindrance. 

Last quarter’s contraction in the world’s third largest economy was bigger than the 1.2% decline that had been forecast. The economy shrank 0.4% in October-December from the previous quarter, according to cabinet office figures. Private consumption, the driving force behind 60% of gross domestic product, slumped by 0.8% in the same period, a bigger fall than the median market forecast of 0.6%.

Some analysts, however, have predicted domestic spending will pick up ahead of a planned rise on the consumption tax, from 8% to 10%, in April 2017.

“However, this should be short-lived, as activity will almost certainly slump once the tax has been raised,” said Marcel Thieliant of Capital Economics. “The upshot is that the Bank of Japan still has plenty of work to do to boost price pressures.” 

The Bank of Japan’s recent decision to adopt negative interest rates of -0.1% – a move that was supposed to to help spur more lending to businesses – has not had the desired effect. Growth has also been stunted by slow increases in wages, leaving households less inclined to spend.

Despite the ups and downs in growth last year, the economy grew 0.4% in 2015 - a slight improvement on the flat-lining of 2014. But this growth pace falls far short of the expansion needed to achieve Abe's goal of a 600 trillion yen ($5.3 trillion) economy by 2020.


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