Economic growth in Japan tipped back into negative territory in the second quarter of 2015, contracting by 0.4% quarter-on-quarter. The figure was slightly above estimates of -0.5% but is sharply down from the first quarter’s upwardly revised 1.1% growth. It also reverses two quarters of growth, when GDP bounced back after a hike in sales tax pushed the economy in recession in Q2 and Q3 of 2015.
Second quarter growth was hurt by lower exports to the US, Europe and Asia, which dragged down GDP by 0.3%. Exports fell by 4.4% over the quarter despite a weaker yen. The Japanese currency has depreciated by around 30% against the US dollar since April 2013 when the Bank of Japan started its latest quantitative easing program. The weak yen has helped Japan’s exports to recover from their 2012 lows. But the benefits from a lower exchange rate have started to wane off in recent months due to slowing global demand and other currencies also depreciating against the dollar in anticipation of a US rate hike.
Trade data to be released on August 19 is expected to show export growth slowing to 5.9% in July. If the figure comes in below estimates, it could add to pressure on the Bank of Japan to expand its quantitative easing program. The Bank of Japan has already been forced to lower its inflation forecast and move back the timing of when it expects to hit its 2% inflation target as falling energy prices have put downward pressure on prices. Some members of the BoJ’s policy board have already expressed doubts as to the Bank’s ability to meet its inflation target by the middle of 2016. BoJ Governor Haruhiko Kuroda recently said that the Bank would consider expanding the size of the quantitative easing program, currently at 80 trillion yen annually, if low oil prices continue to keep inflation near 0%.
Private consumption, which accounts for around 60% of Japan’s GDP, also disappointed, falling by 0.8% from the previous quarter. This is the first fall since the second quarter of 2014 when consumption slumped following the sales tax increase. Consumption has since seen a modest recovery but further falls would put additional downward pressure on the consumer price index, which is currently running at 0.4%.
The weak data adds pressure on Japan’s Prime Minister Shinzo Abe to announce new stimulus measures as his ‘Abenomics’ policies of monetary easing, fiscal stimulus and structural reforms, which he introduced after winning a second term in December 2012 have yet to significantly boost wages and eliminate deflation. Further falls in the value of the yen are likely to have a more limited impact on boosting growth, especially if China allows the yuan to depreciate further in the coming months.
The next focal point could come in October when the Bank of Japan publishes its half-yearly outlook report. In October 2014, the Bank surprised the markets by expanding its quantitative easing program from 70 to 80 trillion yen. A downgrade of its inflation and growth outlook could be jointly followed by further monetary easing.
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