Japan is the third largest economy in the world behind the USA and China. Much of its economic strength stems from its ability to export a wide range of products to the rest of the world. However, something like 60% of Japanese economic output is consumed by the domestic market.
Japan’s economy contracted strongly in Q2 of 2014 declining by 7.3% - the nation’s biggest contraction since the March 2011 earthquake and tsunami. This was followed by a further contraction of 1.6% (on an annualised basis) in Q3. The initial hit was blamed on an increase in sales tax from 5% to 8% which had been planned by the previous government, the Noda administration. A second increase of the sales tax was planned for October of this year, but Shinzo Abe called a snap election at the end of last year, which he comfortably won, and he is expected to delay introduction of the second rise.
The figure for GDP growth in Q4 came in well below analysts’ expectations at an annualised value of 2.2%, significantly below the projected figure of 3.7%, but enough to end the period of recession (defined as two or more consecutive quarters of economic contraction). Consumer spending rose by 0.3% in Q4, but it had been expected to come in at more than twice this level at 0.7%.
The quarter saw export growth of 2.7% over Q3 and imports also increased by 1.3% however, Japan will be benefitting from the recent fall in the price of crude oil and related products as the nation has very little domestic production. It is also expected that Abe will push for a restart of the nation’s nuclear power generation capacity which has been taken off-line since the 2011 disaster. This would help to improve the nation’s balance of payments, but is likely to meet with public concern, if not opposition.