Q2 growth in Japan will be slower than expected due to higher prices and the war in Ukraine

By Daniel Leussink

TOKYO (Reuters) – Japan’s economy will grow at a slower pace than previously thought in the next quarter, in part due to Russia’s invasion of Ukraine and its inflationary effect on global commodity prices commodities and energy, a Reuters poll of economists revealed on Thursday.

Pressure from high energy costs has led to a sharp drop in the yen, which is expected to experience its worst month against the dollar since November 2016, losing almost 6%.

About 60% of survey respondents said the economy would only start to be affected by a decline in the yen if it rose above 130 to the dollar, a sign that most do not view the yen’s recent weakness as particularly bad. The yen is currently trading around 122 to the dollar.

Since the start of the Russian war in Ukraine on February 24, the economic outlook has become even more difficult to predict as rising consumer prices and supply bottlenecks threaten a strong recovery in domestic demand. .

The world’s third-largest economy is expected to grow 4.9% annualized in the next quarter, below February’s forecast of 5.6%, according to the median forecast of nearly 40 analysts in the March 22-30 poll.

A slower expansion still signals the economy will rebound from a contraction this quarter, when it was expected to contract 0.3% annualized. That’s a reversal from a 0.4% expansion forecast for January-March last month.

While consumer activity was generally robust in the second quarter, rising prices are now hurting consumers’ purchasing power, limiting the release of pent-up demand after COVID-19 restrictions end, Hiroshi Namioka said. , chief strategist and fund manager at T&D Asset Management.

“While there is likely to be some growth in the next quarter compared to January-March, it is unlikely to be as strong as first thought given the situation in Ukraine,” Namioka said.

Japanese Prime Minister Fumio Kishida has already ordered his cabinet to draw up another relief plan by the end of April to lessen the economic blow from soaring global energy and commodity prices.

Earlier this month, the government lifted remaining coronavirus restrictions across Japan after Omicron infections subsided following an earlier record rise.

Economists surveyed were not put off by the weak yen, which has traditionally supported Japanese exports.

Asked about the level of the yen against the US dollar that would hurt the economy, 16 of 27 economists said the damage would outweigh the merits when the yen falls below 130 to the dollar.

Six chose a range of 125-130 yen to the dollar, while one chose 120-125, three opted for 115-120 and one chose stronger than 110 yen to the dollar.

The poll also found the economy would expand 2.6% in fiscal 2022, starting in April, after an expected 2.3% growth for that fiscal year.

Both forecasts were slightly lower than expected in last month’s poll, which was conducted mostly ahead of Russia’s action in Ukraine, which Moscow calls a “special operation”.

Core consumer prices, which exclude volatile fresh food prices, will rise 1.6% in next fiscal year and 0.8% in fiscal 2023, following a slight increase of 0.1 % during this fiscal year, according to the survey.

Although this shows that price growth is expected to accelerate in the coming months, around 85% of analysts surveyed said the possibility of the Japanese economy entering a recession in the next two years was low or very unlikely. .

The remaining 15% said it would probably happen, while none said it was very likely.

(For more stories from the Reuters Global Economic Survey:)

(Reporting by Daniel Leussink; Polling by Manzer Hussain and Arsh Mogre; Editing by Sam Holmes)

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