TOKYO (Reuters) - A disappointing reading on Japan’s economy, which suddenly seems to be faltering after two years of steady growth, raises the possibility that it is peaking just as trade friction with the United States escalates.
Economists believe Japan will avert a recession — two quarters of contraction — as they see the first-quarter slump as a soft patch caused by temporary factors like bad weather and weak stock markets.
But looming uncertainties suggest that Prime Minister Shinzo Abe’s program to reflate the economy, known as “Abenomics,” is losing momentum and could force policymakers to ponder additional measures to keep the recovery going.
“If signs of recession emerge, that would derail Japan’s path to beat deflation and show Abenomics failed,” said Atsushi Takeda, chief economist at Itochu Economic Research Institute.
The government could compile a spending package worth up to 3 trillion yen ($27.33 billion) that includes tax breaks for cars and home appliances, if recession risks heighten, he said.
Left with little ammunition to jump-start growth, the Bank of Japan will hold off on ramping up stimulus but maintain its ultra-easy policy despite the rising cost of prolonged easing, analysts say.
The government confirmed Friday that the economy shrank 0.6 percent at an annual pace in the first quarter, worse than the 0.4 percent upward revision in GDP expected by analysts.
The revised data showed that while capital spending rose, consumer spending came in slightly weaker than the preliminary reading.
The first-quarter contraction marked the end to eight consecutive quarters of growth, the longest period of expansion since the 1980s bubble economy.
Private consumption, which accounts for more than half of GDP, fell 0.1 percent in January-March from the previous quarter, versus an unchanged preliminary reading, as households held off on buying cars and mobile phones.
There are initial signs consumption is picking up.
A BOJ index that incorporates spending of retailers and households, seen as the most broad-based measurement of consumption, rose 2.4 percent in April from March, marking the first increase in five months.
Vegetable prices have fallen sharply after spiking in the first quarter due to bad weather, suggesting that households will have more money to spend on non-necessities, analysts say.
Some say the bigger worry is weak factory output. It rose just 0.3 percent in April, well short of market expectations, and inventories rose in a sign firms may have over-produced smartphone parts on hopes of strong global demand.
“I still expect the economy to bounce back in the second quarter, but industrial output forecasts are not strong, and trade friction could become a problem,” said Shuji Tonouchi, senior market economist at Mitsubishi UFJ Morgan Stanley Securities. “The risks are tilted to the downside.”
Escalating trade frictions and threats by U.S. President Donald Trump to impose tariffs on Japanese cars could also hurt corporate bottom-lines and capital spending, analysts say.
Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute, expects the economy to grow by an annualized 1.0 percent in April-June, but warns of longer-term risks from Trump’s protectionist trade policies.
“Companies don’t like uncertainty so they could put off investment plans if trade frictions escalate,” he said. “If the economy were to peak out, that would probably come from external factors beyond Japan’s control.”
Additional reporting by Tetsushi Kajimoto; writing by Leika Kihara; Editing by Malcolm Foster and Eric Meijer