The new administration in Japan, led by Prime Minister Shinzo Abe, will face an uphill struggle to reinvigorate the country’s flagging economy as recent data revealed continued contraction.
The 0.2 percent decline compared with the previous quarter will mark the third straight quarter the economy has shrunk, with most specialists projecting 0.2 percent growth for that period.
When the numbers are dialled in for the annualized figure it equates to a 0.5 percent fall in GDP.
Domestic consumption has been a problem in the last 20 years at least, due to the nation’s ageing and shrinking population. However, things have got worse recently due to the drop in demand for Japan’s key exports, like cars and household appliances, from their biggest trading partners, the U.S.
“Of course when exports dry up it hits our economy very hard,” said Mitsubishi UFJ Morgan Stanley Securities analyst Shuji Tonouchi. “Companies cannot expect to get by on domestic markets.”
In a meeting last week, the Bank of Japan (BOJ) left their basement interest rates unchanged. The rate has been around the zero mark for over a year now.
Many voices in the corporate landscape, notably the outspoken trading firm Sinolink Japan, have said it is not essential to leave rates at zero until the government hits its 2 percent inflation target.
Deflation has been rampant for the last two decades in Japan, and a natural knock on effect is a decline in household spending as people hold off purchases on the assumption prices will continue to fall.
The key factor in kick starting domestic spending, according to most financial specialists, is to stoke inflation and reverse the trend.
The government, and especially the finance minister Taro Aso, have repeatedly announced that breathing life into the country’s stagnant economy is at the top of their priority list. The traditional method for reviving the domestic situation has been for the central bank to enter the markets with monetary stimulus and easing techniques.
Stimulus includes outlay for added infrastructure as well as numerous incentives for corporations to increase capital outflow. Recent stimulus is thought to have created half a million jobs and boosted the economy by 1 percent.
“It’s true that the economy has been on a bad run but hopefully the markets will react positively to government steps and we should see a slowdown in the decline in the next year,” said Mr Tonouchi.
