Japan’s economy contracts on sluggish consumer spending, auto troubles

The Japanese economy contracted at an annual rate of 2% in the first quarter of this year due to declines in consumption and exports, the government reported on Thursday.

Despite a relatively low unemployment rate of around 2.6% in the world’s fourth-largest economy, wage growth has been sluggish, and prices have increased, partly because of the yen’s weakness against the U.S. dollar.

On a quarter-to-quarter basis, the seasonally adjusted gross domestic product (GDP) — which measures the value of a nation’s products and services — fell by 0.5% from January to March, according to the Cabinet Office’s preliminary figures.

The annual rate indicates what the yearly outcome would be if the quarterly rate persisted for a full year.

Recently, the Japanese yen has been trading at its lowest levels in three decades, with the U.S. dollar costing about 155 yen. While this has boosted tourism, it has negatively impacted spending power, particularly for a country that imports nearly all its energy.

The latest economic data was generally worse than analysts had anticipated. Weak consumer spending is a significant issue since private consumption makes up half of Japan’s economic activity.

Additionally, growth was hampered by problems at Toyota Motor Corp.’s subsidiary. Production has since resumed, but earlier this year, the Japanese government ordered Daihatsu Motor Co. to halt production due to falsified safety test results.

Robert Carnell, an analyst at ING, noted that disruptions in car production and sales from the safety scandal negatively impacted overall growth, but he expects a rebound later in the year.

“Monthly activity data already shows a gradual normalization since March,” he said.

The latest figures pose a challenge for Japan’s central bank regarding when to raise interest rates further, an action anticipated to happen sooner or later, possibly in July.

Policymakers are likely to proceed with caution given the weak economy. The Bank of Japan raised interest rates earlier this year for the first time since 2007, but only modestly, to a range of zero to 0.1% from minus 0.1%.