Japan’s economy shrinks for the first time in a year

Japan’s economy contracted unexpectedly for the first time in a year in the third quarter, fueling further uncertainty about the outlook as global recession risks, a weak yen and rising import costs weighed on household and business consumption.

The world’s third-largest economy has struggled to carry on despite the recent lifting of Covid restrictions, and has faced mounting pressure from searing global inflation, sweeping interest rate hikes around the world and to the war in Ukraine.

Gross domestic product fell an annualized 1.2% in July-September, official data showed, compared to economists’ median estimate of a 1.1% expansion and a revised 4-month rise. .6% in the second quarter.

This translated into a quarterly decline of 0.3%, versus expected growth of 0.3%.

In addition to being squeezed by a global slowdown and runaway inflation, Japan faced the challenge of the yen falling to its lowest level in 32 years against the dollar, which amplified pressures on the cost of life by further increasing the price of everything from fuel to food.

“The contraction was unexpected,” said Atsushi Takeda, chief economist at the Itochu Institute of Economic Research, adding that the biggest outlier was higher-than-expected imports.

“But the three main pillars of demand – consumption, capital expenditure and exports – have remained in positive territory, even robust, so demand is not as weak as the overall figure shows.”

However, risks to Japan’s outlook have increased as the global economy teeters on the brink of recession.

Economy Minister Shigeyuki Goto said a global recession could hit households and businesses.

At home, policymakers and citizens are bracing for a potential eighth wave of the Covid pandemic, adding to the sluggishness in private consumption that accounts for more than half of Japan’s economy.

In the third quarter, private consumption rose 0.3%, slightly above the consensus estimate of 0.2% growth, but a marked slowdown from the 1.2% gain in the second quarter.

“Growth is expected to turn positive again in the fourth quarter, amid a rebound in inbound tourism and a narrowing trade deficit, but the eighth virus wave and rising inflation will limit the recovery,” said Japanese economist Darren Tay. at Capital Economics.

Tay noted that non-residential investment rose 1.5% quarter-on-quarter, below consensus of a 2.1% rise and Capital Economics’ own estimate of a solid growth rate of 3. %.

Exports rose 1.9%, but were overwhelmed by strong gains in imports, meaning external demand subtracted 0.7 percentage points from GDP.

Prime Minister Fumio Kishida’s government is stepping up support for households in an attempt to blunt the effects of inflation, with 29 trillion yen ($206.45 billion) in additional spending in the budget. The Bank of Japan also maintained its ultra-loose monetary stimulus program to help revive the economy.

Capital Economics’ Tay sees a tough 2023 for Japan.

“As with 2023, Japan will be dragged into a mild recession in the first half of the year by a global slowdown that will weigh on exports and business investment.”

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