Japanese recovery stumbles

Growth slowdown hurts Prime Minister’s attempts to shake off 20 years of deflation

Shinzo Abe’s plans to revive Japan suffered their first real setback yesterday as growth in the world’s third-biggest economy faltered.

The Japanese Prime Minister has embarked on a bold strategy to shake Japan out of a two-decade battle against deflation with a major public investment programme and money-printing from the Bank of Japan to hit a new 2 per cent inflation target.

But official figures showed Japan’s economy managed growth of just 0.6 per cent between April and June – slower than the previous quarter and below expectations. First-quarter growth was also revised lower and debt has passed the quadrillion – thousand trillion – yen (£6.7trn) mark as the nation seeks a strong enough recovery to begin tackling its borrowing burden, which is about 250 per cent of GDP.

The figures showed the strongest contribution to growth coming from public spending and exports as a much weaker yen boosts trading conditions and the value of overseas profits for Japan’s biggest companies such as Toyota and Honda. But business investment spending slipped back 0.1 per cent over the quarter, the sixth successive quarter of decline, which raises doubts over the recovery’s foundations.

Mr Abe also faces a fight to push through structural reforms to an overly bureaucratic economy – the so-called “third arrow” of his programme – through encouraging foreign investment, and boosting immigration to counter Japan’s ageing population.

Rob Wood, the chief UK economist at Berenberg, said: “If this is going to turn into something more lasting, then Abe needs to encourage companies to put their massive cash piles to work by deregulating the economy and improving the prospects for future growth. The economy needs serious structural reform because of the population issues, and the signs are it is not prepared for that.”

Mr Abe wants to double the amount of direct investment in Japan by foreign companies and open up trade, but he has pledged to protect the country’s heavily subsidised farming industry from which his Liberal Democratic Party draws strong support. He meanwhile faces a tricky decision over whether to go ahead with his planned rises in VAT next year to boost tax revenues, which could impact the recovery.

“With consumption the backbone of recent growth, that could pose challenges for Japan. Enacting the tax rise would damage growth, so discussions about whether to cancel the VAT increase have already started. But failure to enact the change could put into doubt the Prime Minister’s commitment to making the necessary painful reforms,” Mr Wood added.

The Bank of Japan’s governor Haruhiko Kuroda has said the tax increases are needed, and would not hurt the economy. However, Mr Abe is thought to be considering targeted tax-rate cuts, as well as a cut in corporate tax rates to boost business investment.