Coverage: Japan’s economy continues to falter

Japan’s economy contracted in the second quarter, with gross domestic products dropping 1.6 percent year over year.

With slow overseas demand for Japanese goods and a drop in private spending, the weak numbers are raising questions about Prime Minister Shinzo Abe and the Bank of Japan’s ability to stimulate growth.

The Wall Street Journal’s Eleanor Warnock and Mitsuru Obe broke down where the economy struggled:

Exports acted as the biggest drag on Japan’s economy during the quarter, falling a worse-than-expected 16.5% on an annualized basis. Exports to China were especially weak, reflecting a slowdown in the world’s second-biggest economy. Japanese car exports to China fell more than 30% on a dollar basis in the first half of this year, according to Japan External Trade Organization.

Weaker crude-oil prices damped investment in oil and gas development, reducing demand for Japanese construction equipment such as excavators.

The export slowdown had knock-on effects on the domestic economy, reducing overtime for workers and wages, government officials said. According to the GDP data, employee compensation declined 0.2% on quarter after adjustment for inflation, after a 0.6 gain in the first quarter.

Private consumption, which accounts for more than half of economic output in Japan, fell an annualized 3.0% from the previous quarter. In addition to sluggish wage growth, poor weather and low temperatures in June hurt spending on air conditioners and summer clothes.

Japan’s weak yen also raised the prices for many food items—such as ketchup, mayonnaise and curry sauce—prompting households to tighten their purse strings. Economists have said households have spent less as wage increases failed to keep up with prices after the national sales tax rose to 8% from 5% in April 2014.

Jonathan Soble of The New York Times pointed out the slowdown does not bode well for the country’s prime minster, who has been trying to turn it’s economy around:

The slowdown is nonetheless a setback for the government of Prime Minister Shinzo Abe, which has been trying to pull the economy out of nearly two decades of deflation through a stimulus program known as Abenomics.

The program, under which the central bank injects vast amounts of cash into the economy, has kept borrowing costs low and weakened the yen. It has been a boon for global manufacturing companies like Toyota that earn much of their revenues abroad in currencies like dollars and euros.

But while Abenomics has increased profits at big corporations and lifted the stock market, many ordinary Japanese say they feel few benefits. Jobs are plentiful — the unemployment rate is just 3.4 percent, close to an 18-year low — but the paychecks that go with them buy less than they used to. Adjusted for inflation and taxes, average wages have been stuck in a persistent decline.

Bloomberg reporter Toru Fujioka explained how the slowdown in China’s economy is impacting its trade partner:

The economy has been flashing warnings that the weakness could persist. Consumer confidence fell in July to the lowest in six months. Inventories climbed to the highest since 2009 in June, pressuring manufacturers to curtail production.

The stumble comes as China — Japan’s biggest trading partner — is fighting off its own slowdown, with a currency devaluation last week that triggered convulsions in global markets and adds to challenges for Japanese officials in reflating the economy.

Sumitomo Metal Mining Co., Japan’s biggest nickel producer, this month cut its profit forecast as slower Chinese demand weakens commodity prices.

Abe faces a party leadership election next month amid declining public support. More people disapproved his cabinet than approved in July, for the first time since his premiership in 2012, according to public broadcaster NHK.

Leika Kihara and Tetsushi Kajimoto of Reuters described how the weak economy is affecting the nation’s largest businesses:

Economics minister Amari told reporters the government didn’t have any plans as yet to craft a fresh stimulus package, and will instead keep pressuring companies to direct their record profits at raising wages and capital expenditure.

But weak Asian demand casts doubt on whether manufacturers can continue to reap huge profits overseas.

Kobe Steel Ltd, Japan’s No.3 steelmaker, last month cut its annual sales forecast for the year to March 2016, blaming weak sales of hydraulic excavators in China.

“We don’t expect to see a recovery in infrastructure investments and capital spending in China within a year or a year and a half,” Kobe Steel executive vice president Naoto Umehara told reporters at the earnings announcement.