The Japanese economy is shrinking due to weak consumer spending and car problems

TOKYO — Japan's economy shrank 2% annually in the first quarter of this year as consumption and exports fell, the government said on Thursday.

While unemployment in the world's fourth-largest economy has remained relatively low at around 2.6%, wage growth has been slow and prices have risen, partly due to the yen's weakness against the US dollar.

Preliminary seasonally adjusted gross domestic product (GDP), a measure of the value of a country's products and services, fell 0.5% quarter-on-quarter in the January-March period, according to the Cabinet Office.

The annual interest rate measures what would have happened if the quarterly interest rate had lasted a year.

The Japanese yen has recently traded at its lowest level in three decades, with the US dollar trading at around 155 yen. That has helped tourism, but hurts purchasing power, especially for a country that imports almost all of its energy.

The latest results were generally worse than what analysts had predicted. Sluggish consumer spending is a major problem, as private consumption is responsible for half of Japan's economic activity.

Another negative impact on growth was problems at automaker Toyota Motor Corp.'s subsidiary, although production has now resumed. Earlier this year, the Japanese government ordered Daihatsu Motor Co. ordered to stop production of the entire range due to falsified safety test results.

Robert Carnell, an analyst at ING, noted that disruptions to car production and sales caused by the safety scandal have dampened overall growth, but that means they are likely to recover later this year.

“Monthly activity data has been showing gradual normalization since March,” he said.

The latest data poses a challenge for Japan's central bank on when to raise rates further, a move expected to happen sooner or later, possibly in July.

Policymakers are likely to act more cautiously in a weak economy. The Bank of Japan raised interest rates earlier this year for the first time since 2007, but only to a range of zero to 0.1%, from minus 0.1%.

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Yuri Kageyama is on X: https://twitter.com/yurikageyama

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