Japan's economy shrinks again as Abenomics is blown off course

Japan’s economy shrank at an annualised rate of 1.4% in the last quarter of 2015, new figures showed on Monday, dealing a further blow to attempts by the prime minister, Shinzo Abe, to lift the country out of stagnation.

Last quarter’s contraction in the world’s third largest economy was bigger than the 1.2% decline that had been forecast, as slow exports to emerging markets failed to pick up the slack created by weak demand at home.

The economy shrank 0.4% in October-December from the previous quarter, according to cabinet office figures.

Slower exports and weak domestic demand were largely to blame for the contraction – a sign that Abe’s attempts to boost spending is failing to deliver.

Private consumption, the driving force behind 60% of gross domestic product, slumped by 0.8% between October and December last year, a bigger fall than the median market forecast of 0.6%.

Some analysts, though, expect domestic spending to pick up ahead of a planned rise on the consumption (sales) tax, from 8% to 10%, in April 2017.

“However, this should be short-lived, as activity will almost certainly slump once the tax has been raised,” said Marcel Thieliant of Capital Economics. “The upshot is that the Bank of Japan still has plenty of work to do to boost price pressures.”

The Nikkei benchmark index opened sharply higher on Monday, gaining more than 3% off the back of gains on Wall Street and in Europe on Friday, as well as encouraging US retail sales figures.

MSCI’s index of Asia-Pacific shares outside Japan to rise 0.7%, following a loss of almost 4% last week.

Monday’s economic data did contain glimmers of hope, however: capital expenditure rose 1.4% - far higher than the 0.2% forecast, while falling prices for Japan’s oil imports helped net exports grow by 0.1%.

In full-year inflation-adjusted terms, Japan’s economy grew a modest 0.4% in 2015.

Monday’s data come after Japanese shares suffered their worst weekly drop for more than seven years last week, while a surging yen is eating into exporters’ profits.

In what some have described the death-knell for “Abenomics” – his three-arrow policy of monetary easing, fiscal stimulus and structural reform – recent currency and market turmoil have wiped out the gains made soon after he became prime minister in late 2012.

“(The plan) actually worked, but now it is moving in reverse,” said Takuji Okubo, director of Japan Macro Advisors in Tokyo.

“Policymakers are not really helping to make Japan robust enough so that the economy can actually sustain growth... They have basically failed and need to bear the blame”.

The Bank of Japan’s recent decision to adopt negative interest rates – a move that was supposed to encourage banks to lend to businesses – has not had the desired effect.

Tobias Harris, a political risk analyst at consultancy Teneo, said the negative response to the central bank’s surprise move threatened the gains made since Abe became leader.

“To the extent that the stronger yen is driven by external factors - slowing growth in China and its impact on emerging markets, and weak demand in other advanced economies - any additional measures undertaken by the Abe administration or the BoJ may at best have a limited impact,” Harris said.