Japan’s economy has been on a strong run, but some experts are warning it may get left behind by other countries this year.
The world’s third largest economy expanded for the eighth quarter in a row at the end of last year, according to data published Wednesday. That marked its longest uninterrupted streak of growth since the booming days of the 1980s.
The economy has been lifted by years of massive stimulus by the Bank of Japan that aimed to get businesses and consumers spending again after a prolonged period of stagnation and falling prices.
But at the start of the year when much of the global economy is expected to continue enjoying a broad upswing, Japan may lag behind.
“We think that that the economy won’t expand as strongly this year as it did in 2017,” said Marcel Thieliant, senior Japan economist at research firm Capital Economics.
There are already warning signs. In the fourth quarter, growth slowed to 0.5%, significantly below analysts’ expectations.
Japan’s economy grew about 1.6% in 2017, according to preliminary estimates. Thieliant expects that to fade to 1.2% this year.
The International Monetary Fund forecasts a similar slowdown for Japan in 2018. Meanwhile, it predicts growth in other major economies will either accelerate (the U.S.) or remain close to this year’s pace (China, the eurozone).
Structural strains
Japan’s economy may be on a roll, but some experts think the government isn’t doing enough to fix some of the big underlying problems it faces.
These include a rapidly aging population, a lack of women in the workforce and persistently low inflation.
Thieliant says Japan will also struggle to benefit from healthy growth in other countries because it lacks the capacity to expand much further. That can mean a shortage of drivers to deliver goods, not having enough roads or ports to move cargo and a lack of machinery for manufacturing products.
Another part of the problem is that Japanese consumers are wary of spending more money, despite rising wages. That’s because some are saving this extra money for retirement, rather than spending it, according to Jesper Koll, head of investment firm WisdomTree Japan.
“Japanese households are still reluctant to use their newfound purchasing power,” he said.
While Japanese inflation has been picking up a bit, it’s still far below the central bank’s 2% target. Moderate inflation is good for an economy as it encourages consumers to spend.
Recession risk
Japan could be headed for a recession as early as next year, Koll said.
In 2019, the government is due to raise the sales tax, which could hit Japan’s already fragile consumer spending. The last time Japan did that, in 2014, the economy plunged into recession.
What’s more, a building and infrastructure splurge ahead of the Tokyo 2020 Olympics has helped pad economic growth in recent years, according to Koll.
Once that spending fizzles out early next year, it will take a toll on Japan’s growth, he said.