(Bloomberg) — Japan’s economy shrank in the three months through September, as the historic slide in the yen inflated its import bill and a resurgence of Covid-19 cases cooled spending.
Gross domestic product contracted at an annualized pace of 1.2% in the third quarter, slipping into reverse for the first time since last year, the Cabinet Office reported Tuesday. Economists had expected an expansion of 1.2%.
The slowdown reflects Japan’s still long path toward a solid recovery from the pandemic, with further risks clouding the outlook.
The plunge in the yen amplified the country’s already soaring import bill, weighing on net trade. Japan acted in late September to prop up the currency by intervening in markets for the first time in 24 years. The government continued to step into markets in October to rein in sharp slides in the currency largely driven by monetary policy divergence between Japan and the US.
Japan was also hit by another virus wave in the summer, with the number of daily new cases hitting 200,000 in August. The country’s worst surge in cases helped cool consumer spending. While the government didn’t bring back Covid-related restrictions this time, the resurgence of infections led some people to refrain from going out.
Like many of its global peers, Japan has also begun to suffer from accelerating inflation, driven by the weak yen, soaring energy prices and import costs. In September, nationwide inflation surpassed 3% for the first time in over three decades, excluding the impact from tax hikes.
Real wages, however, have been declining for six months since April, eating into consumers’ purchasing power.
To alleviate the impact on households and businesses, Prime Minister Fumio Kishida last month proposed an economic stimulus package that includes aid to reduce energy costs and cash handouts for childcare. His cabinet has approved an extra budget of 29.1 trillion yen ($199 billion) to fund these measures.
What Bloomberg Economics Says…
“Looking ahead, we expect GDP growth to accelerate in 4Q. A fiscal stimulus package that includes domestic travel subsidies, together with an increase in inbound tourism on the back of relaxed border restrictions, will likely support the economy. Higher inflation and weaker external demand remain downside risks.”
— Yuki Masujima, economist
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(Adds more details from release)
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