Japan’s shrinking economy hints at stagflationary risk Achieving inflation has been a long-term goal for policymakers in Japan

TOKYO. – Japan’s lack of growth over the last three quarters points to the risk of a sputtering economy transitioning toward a mild bout of stagflation instead of the positive growth cycle long sought by the central bank.

The latest data show that the world’s fourth-largest economy has failed to grow since spring last year as the strongest inflation in generations weighs on consumer spending

While the consensus scenario is for the economy to rebound this quarter, enabling the Bank of Japan to mull raising interest rates again after scrapping its unconventional stimulus program in March. Saito largely agrees with that view, but notes that the latest economic contraction shows the fragility of an economy at a key turning point.

“Japan’s economy is stagflationary,” said Taro Saito, head of economic research at NLI Research Institute. “There’s barely any growth and inflation is running high.”

That assessment contrasts with the optimism generated by record company profits, soaring stock prices and pledges by companies to offer the biggest wage gains in more than three decades.

Japan’s gross domestic product shrank 2 percent on an annualised quarterly basis in the January-March period, the Cabinet Office said Thursday. Revised data showed the economy flatlined at the end of last year following a slump over the summer.

With inflation still above the BOJ’s 2 percent target, real wages have fallen for two years, the longest losing streak on record.

The cost of living grew at the fastest pace in four decades last year in a huge shift for a nation whose shoppers are accustomed to falling or static prices.

Achieving inflation has been a long-term goal for policymakers in Japan, but as they wait for higher wages to feed into improved consumer spending, the risk of a policy misstep that pushes the economy in the wrong direction remains.

“Personal spending is the biggest reason for the stagnation,” Saito said. “I don’t want to say people are in saving mode because that implies they have money to spend — and they don’t.”

Consumer spending has dropped for four consecutive quarters, the longest stretch of retreats since the global financial crisis. The weakness in the economy may complicate the BOJ’s handling of monetary policy as authorities look for the right time to raise rates as the price trend improves.

While the economy’s performance in the last three quarters has been dismal, inflation at 2.6% and unemployment around the same mark are still a far cry from the stagflation that hit advanced economies in the mid 1970s. US inflation at that time was double digit, while the jobless rate was heading toward 9 percent.

Still, policymakers are in a similar scenario of juggling the risks of exacerbating the economy’s retreat by taking the action needed to curtail inflation contributing to it.

Government officials played down the latest contraction and blamed the adverse effects of temporary factors including an earthquake and disruptions to auto production and sales after a certification scandal blew up at Daihatsu Motor. Yoshitaka Shindo, the nation’s minister for economic revitalisation, said he still sees the economy on a moderate recovery path.

“Still, there is a risk” for consumer spending, Saito said. “It’s a minimum condition that real wages have to turn positive, but whether households actually increase spending is another question. – Bloomberg


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