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Insight on Japan's GDP

NHK's Ai Uchida speaks with Senior Economist at Fujitsu Research Institute Martin Schulz about why Japan's economy contracted in the 3 months to September and what this means for the year ahead.

Schulz: This is really a surprise, and it's a negative surprise unfortunately. We expected growth to be around 2 % on an annualized basis from the summer on. The economy is gradually recovering. We see trends are going up in exports and demand overall, but it hasn't been enough. The economy is still quite weak. It is bottoming out but not quite enough.

Uchida: What about consumer spending, which accounts for about 60 percent of GDP in Japan? What do you make of private consumption following the April consumption tax hike?

Schulz: Yes, we had this tax shock in April. Taxes were going up, prices were going up after a long period of deflation. Households saw increasing prices, increasing costs, and wages only gradually recovering, so the big question was, how are households actually behaving, and these trends are comparatively stable, which is a positive. It's still growing. It's not growing very strongly, but gradually recovering. Now the big point about this data is that businesses have been cutting back. They haven't been investing very much, and they didn't produce a lot to sell later, and this is the news with this data. Plus, housing investment hasn't recovered very fast, so we still have a rather weak economy. But it's not the households. They seem to have accepted the value-added tax hike and they probably would accept another one.

Uchida: What kind of effect will the additional easing measures by Japan's central bank have on the economy?

Schulz: The Bank of Japan seems to have been concerned already throughout the summer and now in the fall, seeing the slow recovery in particular in business sentiment and investment, so they decided, 'we'll go early, we'll push the economy.' It is bottoming out. This could be a positive trend, but a negative trend is also possible, so they are pushing the economy. They are very expansionary. They are hoping to get things going. Trends are looking up but very slowly so this support from the Bank of Japan is very important.

Uchida: Do you think this is supporting the corporate sector?

Schulz: It is supporting the corporate sector. We see that exports are gradually increasing. So far, companies have taken the weaker yen as a windfall. Profits are going up, which is useful, but they haven't been expanding production as much. They are now gradually doing so. They are going into the Asian markets. The weaker yen certainly helps on that.

Uchida: The IMF expects the Japanese economy to grow less than 1% both in 2014 and 2015. They blame sluggish personal spending. How do your estimates compare?

Schulz: The IMF has cut back their forecast for this year and next year as well. I remain more optimistic with this data. I have to cut back, I admit. So it was 1% for this year. It might be a little bit weaker. But I remain rather optimistic for the last quarter and for next year, in particular with expansionary policies now coming in. I think Japan can easily grow 1% next year, which would be solid growth after such a big change in the overall setup.

Uchida: The Prime Minister has reportedly decided to postpone the next tax hike. When the tax rise happens, what will the impact be?

Schulz: Well, beyond the raw data and the state of the economy, of course the big talk is about what will be the impact on Abenomics of the sales tax hike planned for next year. And with this negative data it seems almost certain that politicians will be very careful about going ahead with another tax hike. They will probably want to wait until the economy bottoms out. They will probably ask for new voter support to go on with Abenomics, so there might be quite a few delays, and now we have to hope that this is not taken too negatively, that the more positive trends are seen really as positive trends, as a bottoming out, and that the Japanese economy is still gradually recovering.

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