A street in downtown Tokyo, Japan, is packed with city dwellers. Picture: ISTOCK
A street in downtown Tokyo, Japan, is packed with city dwellers. Picture: ISTOCK

Tokyo — Japan’s economy contracted more than expected at the start of this year, suggesting growth has peaked after the best run of expansion in decades.

That is unwelcome news for a government struggling to get traction for its reflationary policies.

Japan’s economy, the world’s third largest, shrank by 0.6% on an annualised basis, a much more severe contraction than the median estimate for an annualised 0.2% decline.

The contraction, which was driven by a decline in investment and consumption and weaker exports, comes as corporate Japan worries about the possible effect of US President Donald Trump’s protectionist policies on global trade.

Toshimitsu Motegi. Picture: REUTERS
Toshimitsu Motegi. Picture: REUTERS

Economy Minister Toshimitsu Motegi said there was no change to the government’s view that the economy was recovering moderately, predicting a resumption in growth to be driven mainly by private consumption and capital expenditure.

"But we need to be mindful of the impact of overseas economic uncertainty and market volatility," he said.

External demand — or exports minus imports — added 0.1 percentage points to first-quarter gross domestic product (GDP), as imports slowed more than exports.

However, a breakdown of the data shows export growth is losing momentum, expanding just 0.6% in the first quarter after growth of 2.2% in the fourth quarter.

"Globally, IT-related items have been in an adjustment phase, which weighed down Japan’s exports and factory output," said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities.

Economists say while the contraction is temporary, the rebound will not be nearly as strong as previous quarters.

"The economy is not headed for a recession," said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.

"However, it is clear that in the long term the pace of growth is slowing."

Wednesday’s data marked the end to eight straight quarters of economic expansion, the longest sequence of growth since a 12-quarter run between April-June 1986 and January-March 1989, during the asset-inflated bubble economy.

Fourth-quarter growth was revised to an annualised 0.6%, down from the 1.6% estimated earlier.

Capital expenditure fell 0.1%, down for the first time in six quarters, suggesting corporate investment is not as strong as many economists had forecast. The median estimate was for a 0.4% increase.

The capital spending figures may presage data due on Thursday that is forecast to show core machinery orders, a leading indicator of capital expenditure, fell in March for the first time in three months.

Consumer spending fell marginally, registering a decline of less than one percentage point in the first quarter. The median estimate was for consumer spending to remain unchanged.

"The economy is unlikely to continue to contract further. The global economy is performing well and a yen is trading beyond ¥110 against the dollar, so once exports start to grow again, the economy will return to a moderate growth path," said Maruyama of SMBC Nikko Securities.