Japan’s economy shrinks much more than expected in Q3

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A view of Mount Fuji and the Tokyo skyline at dusk.

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Japan’s economy moved at its fastest annual quarterly pace in two years in the July-September period, provisional government data showed on Wednesday, as rising domestic inflation weighed on consumer demand, adding to the woes of trade as demand was declining.

The two declines were Japan’s first in four quarters and are part of an unstable trend since the start of the Covid-19 pandemic in early 2020 that has seen periods of economic expansion alternate with contraction. The latest growth chart highlights the policy challenges facing Prime Minister Fumio Kishida and Bank of Japan Governor Kazuo Ueda in the coming months.

Temporary gross domestic product fell 2.1% in the third quarter compared to a year ago, after expanding 4.8% in April-June. This was the biggest decline since the third quarter of 2021 and a bigger contraction than the 0.6% decline expected in a Reuters poll. The GDP deflator in the third quarter was 5.1% annually.

The world’s third-largest economy also held back 0.5% in the third quarter from the previous quarter, after expanding 1.2% in the second quarter from the first. This was also a bigger than expected contraction of 0.1%.

“The biggest drag on activity came from stock-building, which subtracted 0.3%-pts from GDP growth last quarter. Nevertheless, it is worth noting that there was a simultaneous, widespread decline in private demand, “said Marcel Thieliant, Capital Economics. ‘ head of Asia-Pacific coverage.

The weaker GDP print was partly driven by weaker-than-expected domestic capital spending, which held 0.6% in the third quarter from the second quarter – compared to expectations for a 0.3% expansion, according to the same government press release .

Private consumption in Japan was flat in the third quarter from the previous quarter, as domestic and foreign demand weighed on the economy.

“With real household incomes set to fall at least until the middle of next year, that bodes ill for consumer spending, which we expect to stall next year,” Thieliant said.

The Japanese yen strengthened slightly against the US dollar at around 150.7, coming off a one-year low while still weakening near its lowest level in more than three decades.

The fragility of Japan’s economy reflects the complexity of its central bank as Ueda introduces the possibility of its ultra-easy monetary policy. It also strengthens the case for the Japanese government’s 13.2 trillion yen ($87 billion) economic package aimed at reducing living costs. It is expected that there will be subsidies and payments to low-income households to reduce energy and utility bills.

– CNBC Shreyashi Sanyal contributed to this story.

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