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Japanese Economy is Struggling with Consumers Expenses Cutting and Trade Issues

In: Finance, Forex

Japan’s economy shrank in the first three months of this year as soaring import costs inflated by a weaker yen weighed on trade, and restrictions triggered by the omicron variant of the coronavirus stunted consumer spending.

Gross domestic product contracted at an annualized pace of 1% in the quarter through March, the Cabinet Office reported Wednesday. Economists had expected a decline of 1.8%.

The setback to Japan’s already sluggish recovery from the pandemic stemmed from the deterioration in overall trade as import prices surged, exacerbated by the war in Ukraine and the slide in the currency. The monthly trade balance has been in the red since August after supply-chain snarls and returning global demand started pushing up commodity prices.

Consumer spending also stalled as quasi-emergency curbs cut business hours and restricted activity during the record virus wave. The fourth quarterly contraction of the pandemic leaves Japan lagging behind its global peers in regaining lost ground.

While more recent figures show an uptick in spending and foot traffic after infections dropped and restrictions were lifted, the release of pent-up demand that would fuel a rebound this quarter is likely to be limited by the impact of the elevated energy and import prices.

China’s slowdown induced by its strict virus lockdowns also clouds the prospects for a robust rebound as it weighs on global trade and renews pressure on supply chains.

Japan’s benchmark inflation gauge is forecast to jump toward 2% in a report due on Friday as energy prices soar and the effect of cheap mobile phone fees fades out. Cost pressures for companies rose at a double-digit pace for the first time since 1980 in April, intensifying pressure on firms to pass on higher costs to consumers.

The economy remains far behind its peers in recovering from the pandemic but should at least regain its pre-Covid level in the second quarter if consumption and business investment strengthen.

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