Tokyo: Japan appears to have dodged a recession thanks to resilient business spending but tanking factory and export sectors and a lack of policy options leave it particularly vulnerable if a projected recovery in the global economy fails to materialise.
If domestic growth crumbles, Prime Minister Shinzo Abe could postpone yet again a scheduled sales tax hike in October or offer a modest increase in fiscal spending, some analysts say, report agencies.The Bank of Japan (BOJ), too, may be forced to ramp up monetary support, though many analysts say the central bank is left with few effective tools to prop up growth.
While the chances of such actions are small, they cannot be ruled out given Japan's exposure to economic swings in big export destinations like China, analysts say.
"Chances are fifty-fifty that Abe may delay the sales tax hike again," said Takeshi Minami, chief economist at Norinchukin Research Institute, who see a 70 per cent chance Japan may slide into recession. "If the sales tax is delayed, the BOJ would come under pressure for further easing."
More extreme steps like using government spending as a primary policy tool to boost employment and spur inflation - an idea dubbed "Modern Monetary Theory" (MMT) backed by some US academics and politicians - are off the table for now, government officials say.
"There is no sense that someone is going to latch onto this and push for a huge increase in fiscal spending," a government official with direct knowledge on economic policy-making said, when asked by Reuters about MMT. "However, the government's position is that fiscal and monetary policy need to work together," the official noted.
Factory output and exports slumped in January due to a bruising US-China trade war, forcing the government to cut its economic assessment in March for the first time in three years. But the government held off from declaring Japan in a recession.