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Abenomics may be losing steam just as trade friction escalates

The BOJ will hold off on ramping up stimulus but maintain its ultra-easy policy despite the rising cost of prolonged easing, analysts say.


A DISAPPOINTING reading on Japan's economy, which suddenly seems to be faltering after two years of steady growth, raises the possibility that it is peaking just as trade friction with the United States escalates.

Economists believe Japan will avert a recession - two quarters of contraction - as they see the first-quarter slump as a soft patch caused by temporary factors like bad weather and weak stock markets.

But looming uncertainties suggest that Prime Minister Shinzo Abe's programme to reflate the economy, known as "Abenomics", is losing momentum and could force policymakers to ponder additional measures to keep the recovery going. "If signs of recession emerge, that would derail Japan's path to beat deflation and show Abenomics failed," said Atsushi Takeda, chief economist at Itochu Economic Research Institute.

The government could compile a spending package worth up to three trillion yen (S$36.6 billion) that includes tax breaks for cars and home appliances, if recession risks heighten, he said.

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Left with little ammunition to jump-start growth, the Bank of Japan (BOJ) will hold off on ramping up stimulus but maintain its ultra-easy policy despite the rising cost of prolonged easing, analysts say.

The government confirmed on Friday that the economy shrank 0.6 per cent at an annual pace in Q1, worse than the 0.4 per cent upward revision in GDP expected by analysts.

The revised data showed that while capital spending rose, consumer spending came in slightly weaker than the preliminary reading.

The Q1 contraction marked the end to eight consecutive quarters of growth, the longest period of expansion since the 1980s bubble economy.

Private consumption, which accounts for more than half of GDP, fell 0.1 per cent in January-March from the previous quarter, versus an unchanged preliminary reading, as households held off on buying cars and mobile phones.

There are initial signs consumption is picking up. A BOJ index that incorporates spending of retailers and households, seen as the most broad-based measurement of consumption, rose 2.4 per cent in April from March, marking the first increase in five months.

Vegetable prices have fallen sharply after spiking in Q1 due to bad weather, suggesting that households will have more money to spend on non-necessities, analysts say.

Some say the bigger worry is weak factory output. It rose just 0.3 per cent in April, well short of market expectations, and inventories rose in a sign firms may have over-produced smartphone parts on hopes of strong global demand.

"I still expect the economy to bounce back in the second quarter, but industrial output forecasts are not strong, and trade friction could become a problem," said Shuji Tonouchi, senior market economist at Mitsubishi UFJ Morgan Stanley Securities. "The risks are tilted to the downside."

Escalating trade frictions and threats by US President Donald Trump to impose tariffs on Japanese cars could also hurt corporate bottom lines and capital spending, analysts say.

Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute, expects the economy to grow by an annualised 1.0 per cent in April-June, but warns of longer-term risks from Mr Trump's protectionist trade policies. REUTERS

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