Japan’s economy contracted at its fastest annualised quarterly pace in two years in the July-September period, preliminary government data showed on Wednesday, as rising domestic inflation weighed on consumer demand and export woes were compounded by weakening demand.
Both declines were Japan’s first in four quarters and part of an unstable trend since the start of the Covid-19 pandemic in early 2020, which has seen periods of economic expansion alternate with contraction. The latest growth print underscores the policy challenges facing Prime Minister Fumio Kishida and Bank of Japan Governor Kazuo Ueda in the months ahead.
Preliminary gross domestic product fell 2.1% year-on-year in the third quarter, after expanding 4.8% in April-June. That was the biggest contraction since the third quarter of 2021, and more than the 0.6% decline expected in a Reuters poll. The GDP deflator was 5.1% on an annualised basis in the third quarter.
The world’s third-largest economy also shrank 0.5% quarter-on-quarter in the third quarter, after expanding 1.2% quarter-on-quarter in the second quarter. This was also a bigger contraction than the 0.1% expected.
“The biggest drag on activity came from inventory accumulation, which subtracted 0.3 pp from GDP growth last quarter. Still, it’s worth noting that there was a simultaneous, broad-based decline in private demand,” said Marcel Thieliant, Head of Asia-Pacific at Capital Economics.
The weaker GDP print was partly due to weaker-than-expected domestic investment, which contracted by 0.6% in Q3 from Q2 – against expectations for a 0.3% increase, according to the same government release.
Private consumption in Japan was flat quarter-on-quarter in the third quarter, as both domestic and external demand weighed on the economy.
“With real household incomes set to fall until at least the middle of next year, this bodes ill for consumer spending, which we expect to come to a standstill next year,” Thieliant added.
The Japanese yen was trading at around 150.6 to the US dollar in mid-morning trade on Wednesday, off a one-year low, but still near its lowest level in more than three decades.
The fragility of Japan’s economy underscores the complexities for its central bank as Ueda considers the viability of its ultra-loose monetary policy.
It also strengthens the case for the Japanese government’s 13.2 trillion yen ($87 billion) stimulus package aimed at curbing rising living costs. It’s expected to include subsidies and payouts to low-income households to ease rising energy and utility bills.
