After a period of good growth in the third largest economy in the world, driven by Abenomics, Japan suffered a setback as figures were released on Monday. Year-on-year, the economy shrank at a rate of 0.6%, much higher than the expectation of only a 0.2% decline.
There are fears over President Donald Trump’s protectionist policies, as exports weakened. Adding to this fall, investments went down, as did consumer spending. Japan sends a lot of its export, such as mobile phone parts and factory machines, to China. Trump is keen to clamp down on what he sees as unfair trade practices by the Chinese, which have contributed to the sluggish figures emerging from Japan. ZTE, one of China’s leading telecommunications equipment manufacturers, has broken US sanctions, barring companies from trading with Iran or North Korea, and has been banned from buying components from the US. This does not help Japan’s case, however, as ZTE would be forced to shut down, rather than look for imports from other countries.
The Japanese Central Bank has been following an inflationary policy ever since Prime Minister Abe took power. Led by Haruhiko Kuroda, seen as a key ally for implementing Shinzo Abe’s economic reforms and recently reappointed to a second five-year term as governor of the Bank of Japan, the bank has used all the tools it has to boost growth and investment in the country. If hit by a financial crisis, there are fears that the bank could not be able to respond adequately.
Despite the fall in GDP in the first quarter, many expect the Japanese economy to rebound and post positive figures in the future. However, this growth will not be as strong as over the past two years, when Japan grew at a steady rate, over the longest period since the late 80s. Still, the sluggish rate of growth may prompt a delay in the implementation of a hike in sales tax, from 8% to 10%. A similar move in 2014, when the sales tax went from 3% to 5%, reduced consumer spending and tipped the economy into decline.
It is bad news for Abe, who has built his reputation on reinvigorating the Japanese economy. He has been hit by several scandals in recent months, with calls for him to resign over sweetheart land deals involving close companions of his. Polls released in late April had Abe’s approval numbers at between 30% and 39%. Reduced economic activity may reduce this further.
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