Japan’s economic growth slowed recently. What is the cause?

 Japan’s economy suffered several hard blows due to the coronavirus pandemic. The country reported that economic growth slowed considerably in October-December. The companies tightened spending on equipment and plant. They were forced to sharply cut inventories as the pandemic hit demand.

A sharper contraction in private inventories, along with capital expenditure expanding less than forecasted, also hindered economic growth in the fourth quarter. Exports remained solid, but that proved irrelevant at the broader scale.

According to reports, in January, a bigger annual drop hit hard household spending. It seems consumers were cautious about shopping due to the pandemic and global crisis it induced.

Overall, Japan’s economy grew by an annualized 11.7% in October-December. However, that’s weaker than the preliminary forecast of 12.7% annualized growth.

On Tuesday, Cabinet Office data showed the new reading, which was weaker than analysts’ median forecast for a 12.8% gain. The agency stated that a real quarter-on-quarter expansion was only 2.8% from October-December, while they expected a 3.0% gain.

Meanwhile, capital spending soared by 4.3% from the previous quarter. That is lower than a preliminary 4.5% increase, but it still surpassed the median forecast for a 4.1% rise.

Raw materials, manufactured products, and other private inventories decreased by 0.6 % from revised growth domestic product growth (GDP). Experts estimated only a 0.4% decline.

What do the analysts say on Japan’s economy? 

Yoshiki Shinke, the chief economist at Dai-ichi Life Research Institute, noted that the Covid-19 vaccination began in Japan, but it will take some time to yield its impact. He thinks that the economy will have to go through some ups and downs before stabilizing. However, it should pick up from the second quarter even though regaining what it will lose in the first quarter will be difficult.

Private consumption accounts for more than half of GDP, and it surged forward by 2.2% from the previous three months.

Meanwhile, net exports increased by 1.1 % to revised GDP growth. Domestic demand also soared by 1.8 %. That is weaker than a preliminary contribution of 2 %.

Exports and factory output picked up in January. Even though that signaled a stronger recovery in global demand after last year’s deep coronavirus plunge, the worse-than-expected GDP revision followed that report.

Some experts are concerned that a downtrend in corporate investment and household spending could last longer. That bodes ill for demand, threatening to leave Japan’s economy without a domestic growth driver.

The Bank of Japan plans to conduct a review of its policy tools next week. It wants to make them more effective as the coronavirus pandemic forces the bank to keep its radical stimulus program in place longer than initially intended.