Japan’s economy slips into reverse amid weak yen, inflation

JAPAN’S economy shrank over the summer, pointing to the fragility of the country’s recovery in the face of uncertainties including currency weakness, prolonged inflation and a cloudy outlook overseas.

GDP contracted at an annualised pace of 2.1 per cent in the third quarter, largely on the back of falling business spending and higher imports that dragged on the economy, the country’s Cabinet Office reported on Wednesday (Nov 15).

The contraction was deeper than economists’ estimate of a 0.4 per cent shrinkage.

Wednesday’s data suggests that Japan’s economic recovery remains patchy, lagging behind its global peers. The lacklustre economy may give the Bank of Japan (BOJ) a reason to delay any policy shift away from its massive monetary easing stance.

BOJ governor Kazuo Ueda has maintained that the bank will stand pat until there are clearer signs that a virtuous cycle of wages, prices and growth is strengthening.

Still, he also recently hinted that Japan is making progress towards its 2 per cent stable inflation target, a prerequisite for policy normalisation, fuelling speculation over a possible early shift.

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Japan’s new Deputy Finance Minister Ryosei Akazawa separately said on Wednesday he expected the BOJ to conduct monetary policy appropriately as it strives to achieve its inflation target swiftly.

The contraction in GDP was partly driven by imports, which rebounded from a sharp drop in the spring, with net exports subtracting 0.1 percentage point from the overall GDP figure.

Businesses’ capital spending also decreased 0.6 per cent after a 1 per cent drop in the previous quarter, indicating that companies continued to cut back on investments amid price hikes, despite the increasing need for digitalisation to tackle labour shortages.

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The weak yen has also kept inflation sticky, and it continues to weigh on consumer spending. Private consumption failed to grow as expected from the previous quarter. Analysts had forecast a 0.3 per cent increase. Higher prices, coupled with sluggish pay growth, may risk a further cooling of consumer confidence going ahead.

At a meeting with business leaders and labour unions on Wednesday, Prime Minister Fumio Kishida asked business leaders to raise wages in next year’s spring labour negotiations to a level higher than this year’s against the backdrop of rising prices.

Inbound tourism has been one of the few bright spots in Japan’s patchy economic recovery. The number of visitors arriving in the country in October was about 2.52 million, said the National Tourism Organization.