Japan’s economy unexpectedly shrinks as hot inflation, global slowdown take toll

JAPAN’S economy unexpectedly shrank for the first time in a year in the third quarter, stoking further uncertainty about the outlook as global recession risks, a weak yen and higher import costs took a toll on household consumption and businesses.

The world’s third-biggest economy has struggled to motor on despite the recent lifting of Covid-19 curbs, and has faced intensifying pressure from red-hot global inflation, sweeping interest rate increases worldwide and the Ukraine war.

Gross domestic product fell an annualised 1.2 per cent in July-September, official data showed, compared with economists’ median estimate for a 1.1 per cent expansion and a revised 4.6 per cent rise in the second quarter.

It translated into a quarterly decline of 0.3 per cent, versus a forecast 0.3 per cent growth. On top of being squeezed by a global slowdown and soaring inflation, Japan has been dealing with the challenge of the yen’s slide to 32-year lows against the dollar, which has magnified cost-of-living strains by further lifting the price of everything from fuel to food items.

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

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

Global risks

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

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

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At home, policymakers and citizens are bracing for a potential eighth wave of the Covid-19 pandemic, adding to the gloom for private consumption which makes up more than half of the Japanese economy.

In the third quarter, private consumption grew 0.3 per cent, a touch above consensus estimate for 0.2 per cent growth but slowing sharply from the second quarter’s 1.2 per cent gain.

“Growth should turn positive in Q4, amid a rebound in inbound tourism and a smaller trade deficit, but the eighth virus wave and rising inflation will limit the recovery,” said Darren Tay, Japan Economist at Capital Economics.

Tay noted that non-residential investment increased by 1.5 per cent quarter-on-quarter, below consensus of a 2.1 per cent rise and Capital Economics’ own estimate for a strong 3.0 per cent growth rate. Exports grew by 1.9 per cent but were overwhelmed by hefty 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 to try to ease the effects of cost-push inflation, with 29 trillion yen (S$283.4 billion) in extra spending in the budget. The Bank of Japan has also maintained its ultra-loose monetary stimulus programme to help revive the economy. Capital Economics’ Tay sees a tough 2023 for Japan.

“As for 2023, Japan will be dragged into a mild recession in H1 by a global downturn that will weigh on exports and business investment.” REUTERS