TOKYO – 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 (BOJ) and the government.
The world’s third-largest economy contracted 2.1 per cent in July to September from the previous quarter, largely on the back of falling business spending, a lack of recovery in consumer spending and higher imports, the Cabinet Office reported on Wednesday.
The contraction was much deeper than economists’ estimate of a 0.4 per cent shrinkage. The yen weakened against the US dollar following the release.
The 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 towards normalisation, in the face of continued uncertainties including currency weakness, prolonged inflation and a cloudy outlook overseas.
“This is a weak result,” said Hamagin Research Institute economist Tsukasa Koizumi.
“Particularly consumer spending – I thought the summer services 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 circle of wages, prices and growth is strengthening.
The third-quarter contraction was partly driven by businesses’ capital spending falling 0.6 per cent after a 1 per cent drop in the previous quarter, indicating that firms continued to cut back on investments amid price hikes, despite the rising need for digitalisation to tackle labour shortages.
Private consumption also failed to grow, defying analyst forecasts of a 0.3 per cent 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 ageing population. The number of people in Japan has decreased more than 2 per cent since 2011.
Net exports also dragged on the overall figures, subtracting 0.1 percentage points from the economy. Imports rebounded from a sharp drop in the spring.
Ongoing inflation partly fuelled 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 US dollar on Monday, its lowest level since October 2022, 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 United States, China and Germany, in dollar terms by end-2023.
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 yen (S$152 billion).
The measures centre 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 per cent 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 Daiwa Securities chief economist Toru Suehiro.
“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 materialise.” BLOOMBERG
