Japan’s Growth Slows In Q2

Prime Minister Shinzo Abe has made it clear that his over-riding economic aim is to end deflation in the Japanese economy. The Bank of Japan is targeting an inflation figure of 2% which is comparable with the targets of most other central banks, but the difference in Japan is that the central bank wants to see inflation rise to this target. Deflationary pressure stifles domestic demand since consumers delay purchases for as long as possible, knowing that goods are likely to be less expensive in the future.

Japan has taken strong stimulus measures to improve liquidity in the economy and boost domestic expenditure and this has led to significant falls in the value of the Yen against other major currencies, particularly since Q4 2012. The weaker Yen has made Japanese goods more competitive in their export markets which helped push growth to 4.1% in Q1. However, growth figures just released for the second quarter show that this rate has faltered and growth has slowed to 2.6% (data expressed as annualised rates). This figure has disappointed analysts who had been expecting the Q2 figure to come in at 3.6%. Scrutiny of the Q2 figures shows that the growth was largely due to exports and public spending rather than any significant boost in domestic spending. Investment by Japanese businesses has also fallen which does not auger well for the sustainability of the recovery. The economy came out of recession in Q3 2012 and has now enjoyed three quarters of expansion.

Japan is faced with the largest public debt mountain in the world which stands at more than twice the nation’s GDP or roughly $12 trillion. Abe plans to increase sales tax from 5% currently to 8% in April 2014 and eventually to 10% by October 2015 in a bid to increase government revenue. Weaker growth figures mean that this plan could be revised for fear of damping down growth still further, but it has been a long-term aim to see sales tax revenue rise, so this is unlikely.