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, as global recession risks, a weaker yen and higher import costs weighed on household consumption and businesses, adding to uncertainty about the outlook.

The world’s third-largest economy has struggled to move forward despite the recent lifting of coronavirus restrictions and faces mounting pressure from red-hot global inflation, sweeping interest rate hikes across the globe and the war in Ukraine .

Official data showed gross domestic product fell at an annualized 1.2% rate in the July-September period, compared with the median forecast by economists for a 1.1% rise and a revised 4.6% gain in the second quarter.

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

In addition to being squeezed by a slowing global economy and soaring inflation, Japan has also been grappling with the yen falling to a 32-year low against the dollar, which has further pressured living costs, from food to fuel.

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

“But the three key pillars of demand – consumption, capital spending 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.

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

Domestically, policymakers and citizens are bracing for a potential eighth wave of the coronavirus pandemic, adding to the gloom over private consumption, which 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%, but slowed sharply from the 1.2% increase in the second quarter.

“Growth should turn positive in the fourth quarter as inbound tourism rebounds and the trade deficit narrows, 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% month-on-month, below the consensus estimate of 2.1% and Capital Economics’ own estimate for a strong growth rate of 3%.

Exports rose 1.9 percent, but that was offset by a sharp rise in imports, which meant that external demand took 0.7 percentage points off GDP.

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

Capital Economics’ Tay thinks Japan will struggle in 2023.

“As for 2023, Japan will be dragged into a mild recession in the first half of the year due to a sluggish global economy, which will weigh on exports and business investment.”

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