It’s been a rough weekend for Shinzo Abe.
Japan’s prime minister has been getting all sorts of flack for his apology on the 70th anniversary of the end of World War II. Then he woke up Monday morning to find his economic plan to pull Japan out of its doldrums, Abenomics, has just hit a brick wall.
The Japanese economy contracted at an annualized pace of 1.6% in the second quarter as consumers and businesses cut spending and exports fell, the Cabinet Office reported. The median market forecast was for a drop of 1.9%. Meanwhile, the first-quarter expansion was revised to 4.5%.
Private consumption slid 0.8% from the first quarter, double what analysts’ expected. It was the first decline since the year-ago quarter when consumption fell after the government instituted a sales tax increase.
With personal consumption making up 60% of Japan’s economic activity, this looks like the economy is standing still.
“If weak private consumption persists, that would be a further blow to Abe’s administration, which is facing falling support rates ahead of next year’s Upper House election,” Hiromichi Shirakawa, chief Japan economist at Credit Suisse, told Reuters. “This could raise chances of additional fiscal stimulus.”
Meanwhile, exports are falling from both the economic slowdown in China and the effect it’s having on their Asian neighbors. This doesn’t bode well for the coming quarter.
Overseas demand fell 0.3 percentage point as exports to Asia and the US slumped.
This leaves Abe in a bind. First, the Bank of Japan’s prediction for 1.5% growth this year now seems out of reach. More important, having promised to get Japan out of its deflationary spiral, Abe is going to have to go back to what he’s already been using, monetary and fiscal stimulus.
The problem is the monetary easing has devalued the yen, which in turn has increased food prices. Economics Minister Akira Amari said consumption may have been hurt by rising food prices, a byproduct of the falling yen and higher import costs, reported Reuters. Any further weakening of the yen will only make food costs higher.
That leaves fiscal stimulus. But since Abe took office in December 2012, that’s had limited effect. While the government has provided fiscal stimulus equal to 3% of gross domestic product, the economy has only grown 2% since 2012.
“The effect of Abenomics hasn’t expired, but the policy steps haven’t boosted wages enough to meet rising living costs,” Yuichiro Nagai, an economist at Barclays Capital Japan told Reuters. “There’s not much the BOJ can do, so there’s a higher chance the government may offer fiscal support if consumption fails to rebound in July-September.”