Japan is the world’s third largest economy behind America’s and China’s. It is a major exporting nation and therefore has been hit by the slowdown of the global economy and the trade war between China and the USA. These factors had been expected to result in a small contraction in the Japanese economy in Q1 of 0.2%, but in the end, it expanded by 2.1% (both annualised figures) beating analysts’ expectations.
The economy did show signs of slowing, however, with both the values of exported and imported goods declining. The fall in exports was 2.4% whereas imports saw their largest slump in a decade, dropping by 4.6%. The relative difference between the magnitude of the two figures explains the expansion seen in the economy. It is likely that full year growth will be slightly higher than previously expected.
The Q1 data supports the case for pressing ahead with a planned (and much delayed) increase in domestic sales tax from 8 to 10% due to come into force in October. The increase is intended to secure the economy’s recovery from the chronic deflation which has plagued the nation for decades and to boost the exchequer to offset the costs of an aging population. There had been calls to further delay the increase because of global and domestic economic headwinds. However, Toshimitsu Motegi, Japans Economy Minister stated: "There's no change to our view that the fundamentals supporting domestic demand remain solid", meaning that the rise in sales tax remains on track.
Inflation in the Japanese economy currently stands at 0.9% which is considerably below the Bank of Japan’s target figure of 2%. However, from a historical perspective, it is perhaps not too bad: Japan has experienced record low inflation of -2.5% (October 2009) and peak inflation of 24.9% (February 1974), but from the early 1990s Japan experienced deflation which stymied domestic demand as consumers delayed making significant purchase against the knowledge that goods would be cheaper at a future date.