Tokyo: Japan’s economic expansion may lose pace in the coming months largely due to a slowdown in exports, but a rebound in consumption and robust corporate capital outlays will underpin growth, economists say.
Price conditions, however, remain weak despite a tighter labour market, supporting the view that the Bank of Japan will be in no hurry to raise interest rates.
“The speed of economic expansion will probably slow down temporarily, most notably through production, as the U.S. economy slows and firms adjust inventories,” said Takuji Aida, chief economist at Barclays Capital though the economy will continue to expand steadily based on firmer domestic demand.
The world’s second largest economy expanded by an annualised 5.5% in October-December, marking the fastest growth in three years. While the economy may go through a soft patch, economists expect it to grow around 2 % in 2007.
Japan’s current economic recovery, which is in the longest post-war growth cycle since early 2002, has recently been led by domestic demand such as persistently strong capital spending.
Japan’s economic recovery has often faltered due to a global economic slowdown, but economists say it has become more resilient thanks to upbeat investment plans and a pick-up in non-manufacturing sectors.
Recent data also showed that industrial production fell by a less-than-expected 0.2% in February from a month ago and manufacturers’ output is seen growing in March and April, feeding expectations that a slowdown in output will be only temporary.
Personal consumption, which accounts for about 55% of the economy and has been seen as the weakest link in the current recovery, is also showing signs of improvement.
Against this background, inflationary pressure remains weak in Japan, with core consumer prices falling by 0.1% in February from a year earlier, the first drop in 10 months.
Economists expect the weakness in consumer prices to continue into the second half of this year. That will likely keep the pace of future BOJ rate hikes very slow and many now expect the central bank to hold off from raising rates until after July. In February, the BOJ raised its key overnight call rate target by a quarter percentage point to 0.5%.