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Japan economy expected to rebound from dip, economists say

Slower global economy might hurt future momentum

Revised data confirmed that the economy contracted by an annualized 0.6% in the quarter ending March.   © Reuters

TOKYO -- Japan's longest run of economic expansion since the 1980s has ended, even as economists expect a rebound in the current quarter, with the outlook for the rest of the year tempered by global uncertainties.

Revised data confirmed that the economy shrank by an annualized 0.6% in the quarter ended in March, Japan's Cabinet Office reported on Friday. The contraction put an end to eight consecutive quarters of growth, the longest sequence of growth since a 12-quarter run between 1986 and 1989.

This puts Japan one quarter away from technically being in recession, suggesting a failure of Prime Minister Shinzo Abe's reflationary policy, known as Abenomics, and of the Bank of Japan's ultra-easy monetary policy.

But the majority of economists do not see the country falling into a recession, with gross domestic product for the quarter ending June expected to see a rebound.

Three areas of weakness were behind the contraction in the first quarter: consumer consumption, external demand, and housing investment. But monthly numbers since April show that consumer consumption has already picked up, as climate-related factors, such as higher vegetable prices due to a bad crop, faded. External demand has also rebounded, as trade war fears eased.

"The economic contraction was temporary," said Takashi Miwa, chief economist at Nomura Securities.

Yet, economists were unclear whether the rebounding momentum in external demand would continue beyond the second quarter, because a cyclically slowing global economy might put a hard brake on growth.

"There is a growing sense that the world's economic growth has peaked out," said Daisuke Karakama, chief market economist at Mizuho Bank. He referred to the J.P Morgan Global Manufacturing Purchasing Managers' Index, which had a reading of 53.1 in May, its lowest in nine months. Other indicators such as the OECD's Composite Leading Indicators suggest the global economy is slowing.

"Global monetary tightening may lead the Japanese economy to stagnate," said Ryutaro Kono, chief economist at BNP Paribas (Japan). Following the U.S. Federal Reserve, central banks in Asia are in tightening mode. The Reserve Bank of India was the latest to move, raising its interest rate on Wednesday for the first time in four years. Bank Indonesia held an ad hoc meeting in late May, during which it decided to raise its rates for the second time in a month.

Such decisions might slow world economic growth and eventually hurt external demand -- on which Japan is heavily reliant.

There was also talk among economists that the information technology cycle has peaked as smartphone capabilities mature. Falling demand for electronic devices will negatively affect Japan, where many key device manufacturers are located.

With the world in a cyclical slowdown, any deterioration in matters of global interest such as the U.S.-China trade dispute, North Korean denuclearization, or the tenuous political situation in Italy could have further negative implications.


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