Storm Brewing

The Bank of Japan is on the frontline of these mounting troubles.
The Bank of Japan is on the frontline of these mounting troubles.

Suddenly, the global economic scene isn’t looking so good from Tokyo’s vantage point.

The first quarter saw a hiccup in the second-longest postwar expansion as growth contracted 0.6%. Economists have rushed in to reassure Japan bulls. Don’t worry, they say, this is about short-term inventory excesses that Japan Inc. will fix in short order. The future is bright.

Well, not so much, warns Christine Lagarde, head of the International Monetary Fund. “The clouds on the horizon…are getting darker by the day,” she said recently.

In many ways, officials in Tokyo can attest to that.

A convergence of ills

One concern about the contraction between January and March is just how much went wrong. Private consumption and public demand came in weak, while investment spending and net exports fared even worse. Not deep declines, mind you, but ominous enough of a pause in Tokyo’s eight-quarter growth run to change the basic calculus about where the No. 3 economy finds itself.

The bigger worry is what’s happened since then: Donald Trump’s trade tariffs. The fallout from the U.S. president’s 25% taxes on steel — 15% on aluminum –still have to show up in gross domestic product flows. And then there are the threatened steps that might have corporate giants scaling back plans for investment and salary increases.

Case in point: a threatened 25% levy on car imports. Trump’s desire for a weaker dollar has exporters rethinking expansion plans. His escalating tit-for-tat with China, Japan’s main export partner, means the clouds on the horizon of which Lagarde warned are growing ever larger.

[Interesting Read]

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