Japan’s economy unexpectedly contracted in the third quarter for the first time in a year, fueling further uncertainty about the outlook as global recession risks, a weak yen and higher import costs weighed on private consumption and businesses.
The world’s third largest economy has struggled to keep going despite the recent lifting of Covid curbs, and has faced mounting pressure from blistering global inflation, sweeping rate hikes around the world and the Ukraine war.
Gross domestic product fell an annualized 1.2% from July to September, official data showed, compared with economists’ median estimate for expansion of 1.1% and a revised 4.6% increase in the second quarter.
This resulted in a quarterly decline of 0.3% versus a forecast growth of 0.3%.
In addition to being pressured by a global slowdown and rising inflation, Japan has grappled with the challenge of the yen slipping to a 32-year low against the dollar, adding to cost-of-living pressures it has further raised the price of everything fuel for food.
“The drop was unexpected,” said Atsushi Takeda, chief economist at the Itochu Economic Research Institute, adding that the biggest deviation is imports, which are larger than expected.
“But the three main pillars of demand — consumption, investment and exports — have remained in positive territory, albeit not resilient, so demand isn’t as weak as the headlines suggest.”
However, risks to Japan’s prospects have increased 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 possible eighth wave of the Covid pandemic, adding to gloomy sentiment for private consumption, which accounts for more than half of Japan’s economy.
In the third quarter, private consumption grew 0.3%, slightly above the consensus estimate of 0.2% growth, but slowed significantly from the 1.2% increase in the second quarter.
“Growth should turn positive in the fourth quarter on the back of 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 rose 1.5% qoq, below consensus of a 2.1% increase and Capital Economics’ own estimate of a strong 3% growth rate.
Exports grew 1.9% but were overwhelmed by strong 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 ease the effects of inflation, with 29 trillion yen (US$206.45 billion) in additional spending in the budget. The Bank of Japan also maintained its ultra-loose monetary stimulus program to revitalize the economy.
Capital Economics’ Tay sees a tough 2023 for Japan.
“As for 2023, Japan will be pulled into a mild recession in the first half of the year by a global downturn that will weigh on exports and business investment.”