Japan’s economic growth nearly stalls

Japan’s economy grew unexpectedly slowly in the second quarter as firms cut back on capital spending and exports fell.

Japanese Prime Minister Shinzo Abe has struggled to spark a recovery.

Japan’s economy grew unexpectedly slowly in the second quarter as companies cut back on capital spending and exports fell, highlighting weakness in the world’s third-largest economy, despite massive government stimulus and central bank easing.

Japan’s economy expanded an annualised 0.2 per cent in the April-June quarter, compared with a 0.7 per cent expansion forecast by 20 economists surveyed by The Wall Street Journal. The increase came after a 2.0 per cent expansion in the first three months of the year.

The nearly flat growth showed that over three years after taking office pledging to end decades of sluggish growth, Prime Minister Shinzo Abe has struggled to engender a sustained recovery. Japan also faced headwinds in the quarter. In April, earthquakes caused extensive damage and disruptions to production in western Japan, and a stronger yen hit exporters by making Japan-made goods more expensive abroad.

Spending by businesses was weak. Capital expenditures fell 0.4 per cent in the quarter, the second consecutive quarter of decline.

Household spending was also lacklustre, rising only 0.1 per cent on quarter, compared with a 0.7 per cent increase in the first quarter. Consumer spending makes up roughly 60 per cent of gross domestic product. Economists say consumers have held back on spending because many haven’t received significant pay increases, despite record earnings at many large Japanese companies in recent years.

In contrast, public investment rose 2.3 per cent on quarter, and residential investment rose 5.0 per cent — the biggest jump in a quarter since 2011 — as the Bank of Japan’s easy money policies pushed down interest rates, spurring real estate demand. Economists also said demand ahead of a 2017 sales tax increase pushed up residential investment in the quarter, though Mr Abe announced later the raise would be delayed.

Mr Abe announced in June he will delay a sales-tax increase scheduled for 2017 to 2019 to avoid sending Japan’s economy back into deflation, a spiral of falling prices and wages. A national sales tax increase in 2014 was blamed for chilling economic growth.

Japan’s government has already taken other steps to shore up the economic recovery. The cabinet approved a ¥28 trillion ($US276 billion) stimulus package earlier in August that provides Yen15,000 handouts to 22 million low-income people. Economists say the BOJ might also have to add to its stimulus program in the coming months.

While the second-quarter number was unexpected, many economists say nearly flat growth isn’t surprising for Japan’s economy, given the country’s low potential growth rate. The Bank of Japan most recently estimated Japan’s potential growth rate at 0.21 per cent, and the Cabinet Office put it at 0.3 per cent. Any slowdown in growth can easily cause a contraction.

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