Japan’s economy shrinks for first time in a year

Japan’s economy unexpectedly shrank for the first time in a year in the third quarter, adding further uncertainty to the outlook as risks of a global recession, a weak yen and rising import costs weigh on household consumption and businesses.

The world’s third-largest economy has struggled to move forward despite the recent lifting of Covid-19 restrictions and faces mounting pressure from blistering global inflation, sweeping interest rate hikes around the world and the war in Ukraine.

Gross domestic product fell at an annualized rate of 1.2% in the July-September period, official data showed, compared with economists’ median forecast for a 1.1% increase and a revised 4.6% increase in the second quarter.

It translated into a 0.3% quarterly decline, compared with forecasts for a 0.3% increase.

In addition to being squeezed by a slowing global economy and soaring inflation, Japan has been dealing with the challenge of the yen falling to a 32-year low against the dollar, which has further boosted fuel from food.

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

“But the three key pillars of demand – consumption, capital expenditure and exports – are still in positive territory, if not strong, so demand is not as weak as the headline data suggests.”

However, 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.

At home, policymakers and citizens are bracing for a potential eighth wave of the coronavirus pandemic, fueling pessimism over private consumption, which accounts for more than half of Japan’s economy.

Private consumption rose 0.3% in the third quarter, slightly above the consensus forecast of 0.2%, but a sharp slowdown from the 1.2% increase in the second quarter.

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

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

Exports rose by 1.9%, but were overwhelmed by a surge in imports, which meant that external demand was subtracted by 0.7 percentage points from GDP.

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

Capital Economics’ Tay sees 2023 being tough for Japan.

“As for 2023, the global economic downturn will drag Japan into a mild recession in the first half of the year, which will weigh on exports and business investment.”

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