(Bloomberg) — Japan’s economy slipped back into reverse over the summer, underscoring the fragility of the country’s recovery and backing the case for continued support from the Bank of Japan and the government.
Gross domestic product shrank at an annualized pace of 2.1% in the third quarter, largely on the back of falling business spending, a lack of recovery in consumer spending, and higher imports, the Cabinet Office reported Wednesday.
The contraction was much deeper than economists’ estimate of a 0.4% shrinkage. The yen weakened against the dollar following the release.
Wednesday’s data suggest that Japan’s economic recovery is more fragile than previously thought, and in need of continued government and central bank support. The results may give the BOJ a reason to delay any policy shift toward normalization, in the face of continued uncertainties including currency weakness, prolonged inflation and a cloudy outlook overseas.
“This is a weak result,” said Tsukasa Koizumi, an economist at Hamagin Research Institute. “Particularly consumer spending — I thought the summer service sector spending was fairly solid so the fact that that’s fallen is significant. The inflation we’re seeing is strengthening households’ desire to cut back on spending.”
BOJ Governor Kazuo Ueda has maintained that the bank will stand pat until there are clearer signs that a virtuous cycle of wages, prices and growth is strengthening. Still, Ueda also recently hinted that Japan is making progress toward its 2% stable inflation target, a prerequisite for policy normalization, fueling speculation over a possible early shift.
That speculation continues to grow, said Taro Saito, head of economic research at NLI Research Institute. But looking at the state of the economy, that early normalization scenario could be in jeopardy, he added.
The third quarter contraction was partly driven by businesses’ capital spending decreasing 0.6% after a 1% drop in the previous quarter, indicating that companies continued to cut back on investments amid price hikes, despite the increasing need for digitalization to tackle labor shortages.
What Bloomberg Economics Says…
“Looking ahead, gloomy outlooks for China, the US and other major trading partners will hit exports and continue to deter business spending. The likelihood of a second consecutive quarterly GDP contraction in 4Q should be enough to keep the BOJ wedded to its yield-curve control and negative interest rates for a while yet.”
— Taro Kimura, economist
For the full report, click here.
Private consumption also failed to grow, defying analyst forecasts of a 0.3% increase. Real spending levels were the weakest since the last quarter of 2011, underscoring the fact that longer-term growth is difficult to achieve with a shrinking and aging population. The number of people in Japan has decreased more than 2% since 2011.
Net exports also dragged on the overall figures, as imports, which rebounded from a sharp drop in the spring, with net exports subtracting 0.1 percentage points from the overall GDP figure.
Ongoing inflation partly fueled by a weak yen, coupled with sluggish pay growth may also risk a further cooling of consumer confidence going ahead. The Japanese currency hit 151.91 against the dollar on Monday, its lowest level since October last year when the government intervened in the market to support the yen.
Weakness in the currency is already forecast by the International Monetary Fund to nudge Japan’s economy down to the world’s fourth-largest behind the US, China and Germany in dollar terms by the end of the year.
To address continued sluggish demand and the impact of high prices on households, the government recently added spending to support demand through Prime Minister Fumio Kishida’s latest economic package worth over ¥17 trillion ($113 billion).
The measures center on income tax cuts and handouts to low-income households to help them deal with higher prices. The Cabinet Office estimates the measures could boost the economy by 1.2% annually over the next three years.
“The government has this picture of defeating deflation by passing the stimulus package as a defensive measure, and confirming wage growth next year,” said Toru Suehiro, chief economist at Daiwa Securities. “The BOJ is looking at a similar scenario and they are seen scrapping negative rates in April, but today’s results suggest that that route may not necessarily materialize.”
–With assistance from Toru Fujioka, Yoshiaki Nohara and Emi Urabe.
(Updates with more details from release, economist comments)
OTTAWA – Statistics Canada says the country’s merchandise trade deficit narrowed to $1.3 billion in September as imports fell more than exports.
The result compared with a revised deficit of $1.5 billion for August. The initial estimate for August released last month had shown a deficit of $1.1 billion.
Statistics Canada says the results for September came as total exports edged down 0.1 per cent to $63.9 billion.
Exports of metal and non-metallic mineral products fell 5.4 per cent as exports of unwrought gold, silver, and platinum group metals, and their alloys, decreased 15.4 per cent. Exports of energy products dropped 2.6 per cent as lower prices weighed on crude oil exports.
Meanwhile, imports for September fell 0.4 per cent to $65.1 billion as imports of metal and non-metallic mineral products dropped 12.7 per cent.
In volume terms, total exports rose 1.4 per cent in September while total imports were essentially unchanged in September.
This report by The Canadian Press was first published Nov. 5, 2024.
