Asia Economy

Japan's economy recovers from the effects of major natural disasters

Key Points
  • Japan's economy expanded by 1.4 percent year-over-year in the final three months of 2018, rebounding from the previous quarter's 2.6 percent contraction.
  • Business and consumer spending in Japan recovered from natural disasters, but global trade protectionism remained a concern for the country.

Japan's economy expanded in the fourth quarter as business and consumer spending recovered from natural disasters, however global trade protectionism remained a concern for the country.

The 1.4 percent annualized expansion in October-December matched the median estimate in a Reuters poll. It followed a revised 2.6 percent annualized contraction in July-September as floods and an earthquake temporarily halted production.

The data also showed real exports rose 0.9 percent in October-December from the previous quarter, which was the fastest gain in a year.

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Despite the increase in shipments, some economists remain concerned that exports will weaken this year if the United States and China do not resolve their trade dispute.

"The numbers have rebounded, but Japan is still an economy that is losing momentum," said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.

"The longer trade friction lasts, the more incentive Japanese companies have to halt capex. Trade friction means weaker exports. Japan's overall growth this year won't be as quick as last year or the year prior."

Cabinet Office data showed GDP rose 0.3 percent versus the previous quarter, slightly less than the median estimate for 0.4 percent growth. That followed a downwardly revised 0.7 percent contraction in July-September.

In September a large earthquake triggered a blackout in the northern island of Hokkaido, which followed severe typhoons that damaged airports and transport infrastructure in western Japan.

Businesses were quick to resume normal operations after these disasters.

Rescue workers search for survivors from a house damaged by a landslide caused by an earthquake in Atsuma town, Hokkaido, Japan on September 6, 2018.
Kyodo | Reuters

Capital expenditure was the biggest driver of growth in October-December, rising 2.4 percent. That compares with as 2.7 percent contraction in the previous quarter, a smaller decline than initially estimated. The median estimate was for capital expenditure to rise 1.8 percent.

Private consumption, which accounts for about 60 percent of GDP, was the second-biggest driver of growth. Consumption rose 0.6 percent in October-December, which was less than the median estimate for a 0.8 percent increase and followed a 0.2 decline in the previous quarter.

"The economy is in gradual recovery as growth is led by private demand," Japanese Economy Minister Toshimitsu Motegi said in a statement.

"China-bound exports of information-related materials have weakened as the Chinese economy slowed. We need to monitor uncertainty over global economic outlook including Chinese economy as well as fluctuations in financial markets."

External demand — or exports minus imports — shaved 0.3 percentage point off gross domestic product, less than the median estimate of minus 0.4 percent. A breakdown of the data showed a 2.7 percent jump in imports more than offset the increase in exports.

Despite the rise in exports, some economists remain cautious about the outlook for overseas demand.

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A trade war between the United States and China, the world's two largest economies, is a major risk for Japan's exports of car parts, electronics, and heavy machinery to China, which are used to make finished goods destined for the United States and other markets.

"We expect exports for January-March will deteriorate as shipments of IT-related products to Asian nations, especially to China, will likely fall as the adverse impact from trade conflict appears," said Hiroaki Muto, chief economist at Tokai Tokyo Research Institute.

"The economy for January-March is expected to grow but the global economic slowdown and a planned sales tax hike will hurt."

Another risk is the Japanese government's plan to raise the nationwide sales tax to 10 percent from 8 percent in October.

The government needs the extra tax revenue to pay for rising welfare costs, but some policymakers and economists worry the tax hike could hit consumer spending and weaken sentiment.