Japan’s economy shrinks in January and February – but monetary stance unchanged

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Real economy shrank in January and February but revised growth forecast raised to 2.4% from 1.9%

Japan’s economy shrank in January and February, data showed on Thursday, but analysts raised their growth forecast for the current fiscal year as a weakening of a virus that led to months of sluggish demand was noted.

The statistics bureau data showed that the real economy shrank by an annualised 1.1% in January and February compared with the preceding two months, which was worse than the 0.3% contraction expected by analysts.

The numbers indicate that growth has ground to a halt since the last quarter of 2017, dragged down by weak domestic demand.

Separate data showed that industrial production unexpectedly fell in February for the third straight month, down 1.1% compared with expectations of a 1.3% rise.

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Despite these signals of weakness, analysts said that the economic outlook is brightening as a viral outbreak that caused a slowdown in business demand last summer has subsided.

Takumi Tsunoda, a senior economist at Shinkin Central Bank Research Institute, said the estimates point to weaker growth, adding that Japanese economic fundamentals are not as gloomy as they were in 2017.

“All is not lost yet, as there are hopes for much stronger growth in the second half of the year,” Tsunoda said.

The Bank of Japan’s improved view on domestic demand has been encouraging sentiment, Tsunoda said.

The central bank has lowered its inflation target to 2% from 2.0% even as economic growth appears to be peaking out.

The BOJ raised its growth forecast for the fiscal year through March 2019 to 2.4% from 1.9% after revisions of the 2017 data, according to the statistics bureau.

But economists forecast that growth will slow to just 0.7% next year.

The Bank of Japan’s governor, Haruhiko Kuroda, who is set to leave office this summer, has a long list of challenges to tackle, including slow inflation.

“What matters in monetary policy is the future of inflation, and we don’t know what that looks like,” he said last month.

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