You are here

Japan's economy contracts more than expected in Q3

Natural disasters, decline in exports behind downturn; Tokyo sticks to its view that moderate rebound continues

Tokyo

JAPAN'S economy shrank more than expected in the third quarter, hit by natural disasters and a decline in exports, a worrying sign that trade protectionism is starting to take its toll on overseas demand.

The contraction in the world's third-largest economy adds to growing signs of weakness globally, with China and Europe losing momentum.

Data released later in the day showed Germany's economy also contracted in Q3 on weak foreign trade.

sentifi.com

Market voices on:

Despite the setback, Japan's government stuck to its view that the economy continues to recover moderately, blaming the contraction on typhoons and an earthquake that halted factories and stifled consumption.

But some analysts said such one-off factors alone could not explain the downturn, pointing to worrying declines in exports amid slowing Chinese demand and the fallout from escalating global trade friction.

"The decline in exports cannot be attributed entirely to the natural disasters," said Hiroaki Muto, economist at Tokai Tokyo Research Center.

"The message is China's economy is weakening, which means Japan's exports will be slow to recover and growth will stall around the first half of next year."

The annualised 1.2 per cent contraction in July-September was bigger than a median estimate for a 1.0 per cent drop and followed a robust 3.0 per cent expansion in the previous quarter, government data showed on Wednesday.

The slump was driven largely by a 1.8 per cent fall in exports, the biggest drop in more than three years. Capital expenditure, which rose 3.1 per cent in April-June, dropped 0.2 per cent to mark the first decline in two years, the data showed.

Analysts do expect a rebound in the current quarter, but warn it could be tepid and growth could stall next year, when the strains from trade conflicts become more acute. "Japan's economy may slow down from January onwards as the US-China trade war intensifies," said Masaki Kuwahara, senior economist at Nomura Securities. "US tariffs on its imports of Chinese goods take effect in January, curbing Chinese shipments, which will in turn damage Japanese exports and capital expenditure."

Heightening overseas uncertainties add to headaches for Japanese policymakers, already worried by the expected blow to consumption from next year's scheduled sales tax hike.

Private consumption, which accounts for about 60 per cent of GDP, fell 0.1 per cent in July-September as consumers spent less on travel, lodgings, and dining out.

While the government is considering a stimulus package of around 10 trillion yen (S$121 billion) to offset the tax hike impact, a darkening overseas outlook could strengthen politicians' calls for even bigger spending.

That puts policymakers in a bind. Many analysts see little room for the Bank of Japan to ramp up an already huge stimulus drive that is straining financial institutions. Japan's ballooning debt pile, the biggest among advanced economies, also constrains the government's ability to deploy a big spending package. REUTERS