Japan’s economy shrinks for first time in a year

Japan’s economy unexpectedly contracted in the third quarter for the first time in a year, raising further uncertainty about the outlook as risks of a global recession, a weak yen and higher import costs weighed on household consumption and business.

The world’s third-largest economy has struggled to move forward despite the recent lifting of Covid restrictions and has faced escalating pressure from soaring global inflation, rising interest rates around the world and the war in Ukraine.

Gross domestic product fell 1.2% year-on-year in July-September, official data showed, compared with economists’ average estimate of a 1.1% expansion and a revised 4.6% growth in the second quarter.

It turned into a quarterly decline of 0.3%, against a forecasted 0.3% increase.

Along with being weighed down by a global slowdown and rising inflation, Japan is facing the challenge of the yen falling to a 32-year low against the dollar, which has pushed up the cost of living, further pushing up the price of everything. fuel for food.

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

“However, the three main pillars of demand – consumption, capital spending and exports – remained in positive territory, if not firm, so demand is not as weak as the headline picture suggests.”

However, risks to Japan’s outlook 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.

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At home, policymakers and citizens are bracing for a potential eighth wave of the Covid pandemic, adding to the gloom for private consumption, which accounts for more than half of Japan’s economy.

Private consumption rose 0.3% in the third quarter, beating the consensus estimate of a 0.2% rise, but slowing sharply from the 1.2% increase in the second quarter.

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

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

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Exports rose 1.9%, but were weighed down by a sharp rise in imports, meaning external demand subtracted 0.7 percentage points from GDP.

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

Capital Economics’ Tay sees a tough 2023 for Japan.

“As for 2023, Japan will slip into a mild recession in the first half of the year due to a global slowdown, which will affect exports and business investment.”

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