Japan's GDP shrinks over 2% amid high inflation
Japan's economy shrank by 2.1% in the July-September quarter driven by slow consumption and exports, ending two quarters of growth. The decline is complicating Bank of Japan's efforts to taper its monetary stimulus in the face of rising inflation. Takeshi Minami, chief economist at Norinchukin Research Institute, stated, "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."
Stubbornly high inflation affects household spending
Rising inflation has adversely affected household spending, adding pressure on manufacturers who are already grappling with a slowdown in global demand, including from China. Inflation-adjusted real wages, an indicator of consumer purchasing power, dropped 2.4% in September compared to a year earlier, marking the 18th consecutive month of declines. Consequently, Prime Minister Fumio Kishida has called on companies to raise wages and announced initiatives to alleviate the economic impact of increasing living costs.
Consumption and capital expenditure disappoint
Consumer spending remained stagnant in July-September after a 0.9% decrease in the previous quarter, falling short of economists' median projection for 0.2% growth. Capital expenditure also underperformed, declining by 0.6% in Q3 following a 1% drop in April-June. This outcome contradicts market expectations for a 0.3% increase and raises questions about the BOJ's belief that strong corporate investment will bolster growth.
Weak export recovery exposes domestic demand issues
Stefan Angrick, senior economist at Moody's Analytics, noted that the disappointing Q3 results serve as a reminder that Japan is not yet in the clear. He explained that improved net exports, driven by car shipments and tourism, had contributed to growth in Q2, concealing the weakness in domestic demand. "Now that the export recovery has run its course, that weakness is coming back to the fore," Angrick said.
Japan's economic recovery post-pandemic
Japan's economy has been making a slow recovery from the COVID-19 pandemic as it reopened borders and lifted restrictions, contributing to the strong growth in April-June. However, despite significant profits for major exporters due to the devalued yen, household wages haven't kept pace with the steady rise in inflation, leaving households feeling the pinch.
