Japan’s economy shrank from July to September, ending two quarters of growth fueled by exports and sluggish consumption. This made the central bank’s efforts to gradually reduce its large monetary stimulus programme more challenging in the face of rising inflation.

According to the data, persistently rising inflation is having a negative impact on household spending and making manufacturing more difficult due to a slowdown in global demand, particularly in China.

“Given the absence of a growth engine, it wouldn’t surprise me if the Japanese economy contracted again in the current quarter. The risk of Japan falling into recession cannot be ruled out,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

“The weak growth and the spectre of slowing inflation could delay the BOJ’s exit from negative interest rates,” he said.

The GDP of the third-largest economy in the world shrank 2.1% in the third quarter, according to government figures released on Wednesday. This was a significantly worse loss than the consensus market estimate of an annualised 0.6% fall. It came after a 4.5% expansion in the preceding quarter.

The lacklustre number belies policymakers’ expectations of a post-pandemic rebound in domestic economy to counteract reduced external demand from China and elsewhere. It indicates a lacklustre consumption and capital expenditure.

Following a 0.9% decline in the previous quarter, consumption was flat from July to September, missing the median growth projection of 0.2% of experts.

After falling 1.0% in April-June, capital expenditure declined 0.6% in the third quarter, confusing market expectations for a 0.3% gain and undermining the BOJ’s belief that strong business investment will support growth.

According to projections, external demand reduced GDP by 0.1 percentage points from July to September, with increases in service imports offsetting increases in vehicle exports.

“The disappointing third-quarter reading serves as a sobering reminder that the country is not yet out of the woods,” said Stefan Angrick, senior economist at Moody’s Analytics.

He claimed that despite weakening domestic demand, higher net exports—supported by auto shipments and tourism—helped boost growth in the second quarter.

“Now that the export recovery has run its course, that weakness is coming back to the fore,” Angrick said.

Strong April-June growth was partly due to Japan’s economy, which had been recovering from the pandemic slowly as it reopened borders and lifted restrictions on activities.

Although large exporters have benefited greatly from the weakening yen, salaries have not increased quickly enough to offset the inflation that has been steadily rising for households.

For the eighteenth consecutive month, real wages adjusted for inflation, a measure of consumer spending power, decreased 2.4% in September compared to the same month last year.

Although many are sceptical that the measures would have much of an impact on reviving the economy, Prime Minister Fumio Kishida has increased calls for businesses to increase salaries and unveiled a package of measures to lessen the financial damage caused by rising living expenses.

(Adapted from RepublicWorld.com)

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