TOKYO (Reuters) – Japan's economy has shrunk more than expected earlier this year, suggesting that growth has peaked in decades after the best phase of expansion, unwelcome news to a government fighting for its reflationary policy.
Japan's economy, the third largest in the world, shrank by 0.6 percent on an annualized basis, a much stronger contraction than the median estimate of an annualized decline of 0.2 percent.
The contraction, driven by a slowdown in investment and consumption and weaker exports, is due to Japan Inc.'s concerns over the potential impact of US President Donald Trump's protectionist policies on world trade.
Economics Minister Toshimitsu Motegi said the government's view that the economy is recovering moderately will not change, and that growth is expected to resume, mainly due to private consumption and investment spending.
"But we need to be aware of the impact of economic uncertainty abroad and market volatility," he said.
Foreign demand – or exports less imports – increased first-quarter GDP by 0.1 percentage point as imports slowed more than exports.
However, a breakdown of the data shows that export growth is losing momentum, rising only 0.6 percent in the first quarter after growing 2.2 percent in the fourth quarter.
"Worldwide, IT-related products are in an adjustment phase that weighed on Japan's exports and factory production," said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities.
Economists say that while the contraction is temporary, recovery will not be nearly as strong as in previous quarters.
"The economy is not geared for a recession," said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.
"However, it is clear that the rate of growth slows down in the long run."
The data from Wednesday marked the end of the first eight quarters of economic expansion, which was the longest growth in a quarter-year between April-June 1986 and January-March 1989 during the asset-inflated bubble economy.
Fourth-quarter growth was revised to an annualized 0.6 percent, compared to the previously estimated 1.6 percent.
Capital expenditures fell 0.1 percent, for the first time in six quarters, suggesting that corporate investment is not as strong as many economists had predicted. The median estimate was for an increase of 0.4 percent.
Investment figures predicting data due on Thursday for which core engine orders, a leading indicator of investment, are forecasted to fall in March for the first time in three months.
Consumer spending declined slightly and fell less than one percentage point in the first quarter. The median estimate was that consumer spending remained unchanged.
"The economy is unlikely to shrink any further, the global economy is doing well, and a yen is trading over 110 yen against the dollar, and as soon as exports start to grow again, the economy will return to a moderate growth path," Maruyama said SMBC Nikko Securities.
coverage by Stanley White and Leika Kihara; Editing by Eric Meijer