Economy contracts by 2,1% in Japan

Japan’s economy faced a setback with a contraction at a 2.1% annual pace in July-September, according to the government’s announcement on Wednesday. This decline was attributed to weakened consumption and investment, compounded by sluggish wage growth in the world’s third-largest economy. In quarterly terms, the economy experienced a contraction of 0.5%, a figure that was unexpectedly weak.

Private consumption saw an annualised shrinkage of 0.2%, and corporate investment decreased by 2.5%. The subdued performance, coupled with weakening investment and demand in other major economies, led analysts to anticipate a slowdown in Japan’s GDP growth from 1.7% in the current year to 0.5% in 2024, as indicated by Marcel Thieliant of Capital Economics.

Contrary to earlier quarters, where the economy had shown growth at a revised annual pace of 4.5% in April-June and 3.7% in January-March, the latest figures revealed a disappointing contraction. ING, the financial services company, expressed surprise at the weaker-than-expected performance, as it had forecast an annual contraction of 0.5%.

Prime Minister Fumio Kishida responded to the economic challenges by announcing a stimulus package exceeding 17 trillion yen ($113 billion). This package includes tax breaks and benefits for low-income households grappling with rising prices for necessities due to global inflation and a weak yen.

The impact of COVID-19-related social restrictions was evident in the previous quarters, but with their lifting, economic activity was supported by recoveries in inbound tourism and exports. However, the recent quarter saw a contraction in consumer spending, business investment, and inventory accumulation, contributing to the disappointing overall performance.

Exports managed to eke out a modest 0.5% growth in the latest quarter, contrasting with a 3.2% rise in the second quarter. Auto exports recovered after facing challenges like shortages of computer chips and other components. Public demand, including government spending, rose at an annual pace of 0.6% in the latest quarter.

In response to the economic challenges, Japan’s central bank is unlikely to consider any move toward higher interest rates. The Bank of Japan has maintained a super-easy monetary policy for years, including zero or below-zero interest rates, aimed at stimulating an economy grappling with deflation, reflecting the stagnation caused by Japan’s aging and shrinking population.