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Japan's growth streak ends as consumer appetite cools

Economists expect rebound but see labor shortage and protectionism as risks

Containers are seen at an industrial port in Yokohama, Japan.   © Reuters

TOKYO -- Japan's economy contracted by an annualized rate of 0.6% in the January-March quarter, marking an end to the longest streak of growth since the late 1980s, as consumer spending and capital expenditure slowed.

While most economists expect to see a return to growth in the second quarter, some have raised concerns that a tight labor market and increasing trade tensions could stymie expansion.

Preliminary government data released on Wednesday showed that real gross domestic product had suffered its first decline since the October-December quarter of 2015. The fall was steeper than the 0.2% contraction forecast by economists polled by Reuters.

Private consumption fell slightly as a rise in fresh vegetable prices and sluggish wage growth cooled consumer spending.

Capital expenditure fell 0.1%, its first decline in six quarters. Export growth also slowed to 0.6% from 2.2% in the fourth quarter, partly due to lower shipments of semiconductors and related goods.

The growth rate in the fourth quarter of 2017 was revised down to an annualized 0.6%.

In response to the figures, Japan's Minister for Economy, Trade and Industry Toshimitsu Motegi said there was "no change to the government's view that the economy was recovering moderately."

Takuji Aida, Chief Japan Economist at Societe Generale Japan, blamed bad weather for some of the decline in investment and the higher cost of vegetables. With easing fresh vegetable prices and solid manufacturing activity data in recent weeks, many expect GDP growth to recover in the second quarter.

But the country's labor shortage and the prospect of increased trade tensions between the U.S. and China have been cited as risks that could hamper recovery.

"What I am most concerned about is trade friction between the U.S. and China," said Kiichi Murashima, an economist at Citi Research. "It is less about the impact on global trade and more about companies' sentiment being affected, which can lead to postponing capital investment."

Harumi Taguchi, principal economist at IHS Markit, said Japanese exports of electronic devices to China already might have been impacted by the U.S. decision to ban ZTE, the telecom equipment maker, from buying American technology. But "a continuous decline is unlikely because I think compromises will be made between the two countries," she added.

"The bigger picture is that the economy is running into capacity constraints," said Marcel Thieliant, Senior Japan Economist at Capital Economics. "The historical experience is that growth slows as spare capacity diminishes."

Japan's population is declining at a record pace of more than 1,000 people per day, according to government data, intensifying the competition for workers and leading to calls for more immigration. The government is currently considering a plan to allow foreign trainees to stay in Japan for longer periods.

Akane Okutsu in Tokyo contributed to this story.

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