Japan’s economy contracts as weak consumption undercuts recovery

Japan’s economy contracted more sharply than expected in the third quarter, underscoring the fragility of its post-pandemic recovery and complicating the Bank of Japan’s efforts to gradually unwind its easing measures.

Gross domestic product declined 2.1 per cent on an annualised basis on weak household consumption and business spending, much deeper than the average 0.4 per cent fall forecast by economists. 

The reading translated into a 0.5 per cent contraction on a quarterly basis, according to preliminary figures released by the cabinet office on Wednesday.

Japan’s economy had rebounded from the Covid-19 pandemic during the first six months of the year, mainly on the strength of resurgent car exports and the return of inbound tourists. 

But some economists have warned the economy is starting to lose steam as the weak yen and higher living costs damp domestic consumption. Companies have also held off on investments due to rising prices and economic uncertainty in the US and China. 

“Weakness in consumption is going to keep growth trends pretty restrained overall,” said Stefan Angrick, a senior economist at Moody’s Analytics, projecting that a recovery in consumption was unlikely until the middle of next year.

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Consumption was flat for the three months to September, while capital expenditure fell 0.6 per cent on the previous quarter, after both gauges fell in the April to June quarter. 

Prime Minister Fumio Kishida this month announced a $113bn stimulus plan to address the pain from high inflation with temporary income and residential tax cuts and cash handouts to low-earning households.

But economists said the measures, which also included extending energy subsidies and support for businesses to raise wages, would offer only a minimal boost to the economy. 

The economic slowdown over the summer is expected to complicate an already challenging environment for the BoJ to plot its exit from decades of ultra-loose monetary policy. 

The weak yen and higher inflation, which after decades of deflation has proven more persistent than expected, have put increasing pressure on the BoJ to dial back its easing measures.

The central bank last month took a significant step to end its seven-year policy of capping long-term interest rates, saying it would allow the yields on 10-year Japanese government bonds to rise above 1 per cent.

Most economists expect the BoJ to also end its short-term negative interest rates — the only ones remaining in the world — by next spring at the latest.

The yen has edged close to a 33-year low against the dollar this week, fuelled by the yawning gap between US and Japanese borrowing costs.

But Kazuo Ueda, the BoJ’s governor, told the Financial Times Global Boardroom conference last week that unwinding the central bank’s sweeping stimulus policies would be “a serious challenge”, adding that it would proceed carefully with raising interest rates.

“The BoJ will want to avoid weakening the yen further,” said Angrick. “At the same time, if it pulls back on monetary support too quickly, . . . it will kill the domestic economy and that’s not going to help with the exchange rate either. It’s a headache for the BoJ.”