In a Surprise, Japan’s Economy Grew in The First Quarter, Despite a Slowdown in China

In a Surprise, Japan’s Economy Grew in the First Quarter, Despite a Slowdown in China

TOKYO — Japan reported a surprising economic upswing in the first three months of the year, but the sunny figures belied continuing weaknesses that threaten the country’s prospects.

Japan’s economy, the third largest in the world behind the United States and China, grew at an annualized rate of 2.1 percent in the first quarter of 2019, according to data released on Monday by Japan’s Cabinet Office. Economists had expected the economy to shrink because of weakened demand from China as that economy slows.

A closer reading of the Japanese figures gave economists little reason to cheer. Private consumption and exports fell. Japan’s surprise performance stemmed in large part from a sharp drop in imports, which fell more dramatically than exports. That wider trade surplus enhanced Japan’s bottom line, even as it signaled that Japanese businesses and consumers are reluctant to spend.

“As weak imports should signify weak domestic demand, it is definitely not a reason to rejoice,” said Takuji Okubo, chief economist for Japan Macro Advisors, a research firm.

The surprise expansion comes despite an increasingly gloomy global outlook. China, a major contributor to global growth, has been hit by its trade war with the United States and by its efforts to contain its debt problems. Though China has taken steps to stimulate growth, further slowdowns could ripple through Asia and the rest of the world. Japanese companies across a wide range of industries, especially in sectors that supply unfinished components to Chinese manufacturers, have already made huge downward revisions to their earnings forecasts.

The report offers a mixed bag for the country’s prime minister, Shinzo Abe, who has made reinvigorating Japan’s economy a centerpiece of his appeal to voters. While the headline figure could give him political cover to push his policies past lawmakers, it does little to change Japan’s difficult position. “In terms of policy implications, the seemingly positive growth is unlikely to convince policymakers all is well,” Mr. Okubo said.

For decades, Japan has been struggling to find its way out of the economic doldrums that began in the 1990s. Mr. Abe came to office in 2012 pledging to turn things around with a package of economic reforms, known as Abenomics. They included loose monetary policy, heavy government investment, and reforms to sclerotic social and corporate structures that have suppressed the country’s economic performance.Since then, Japan has largely experienced modest growth, except for a brief fall into recession in 2014 following an increase in the country’s consumption tax. But much of that success coincided with China’s remarkable economic rise.

Despite the positive economic data, Mr. Abe’s policies look set to face a difficult test now that Japan’s neighbor is slowing. He has committed to once again increasing the country’s consumption tax in October, this time to 10 percent from 8 percent. He says the increase is necessary to pay down the country’s huge debt and fund social programs that are expanding as the country’s population ages. Japan’s debt ratio is the highest among developed nations at roughly two and a half times the country’s annual economic output.

Mr. Abe has already delayed the tax raise twice. His insistence on sticking to the October deadline has drawn condemnation from across the political spectrum, including from members of his own party, who argue that raising the tax now could push the country into recession.

Nevertheless, the Abe administration has said it will take an economic shock on the scale of the 2008 financial crisis to derail its plans.

Though Monday’s report was mixed, the strong headline figure may also open some space for Mr. Abe in his negotiations with the United States over a trade deal between the two countries.

President Trump has frequently complained about the trade deficit between the United States and Japan and is using the threat of auto tariffs as leverage in trade negotiations with Tokyo that kicked off in Washington last month.

Mr. Trump arrives in Tokyo on Saturday to meet Japan’s new emperor, Naruhito. During the visit, he is expected to talk trade with Mr. Abe. Both sides have said they hope to come to an agreement quickly.

But with Japanese upper house elections coming in July, Mr. Abe may be leery of making any concessions to the American president that could be seen as potentially damaging Japan’s economic situation.

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