Japan’s economy contracts 0.5% in Q3 as consumption, exports falter

Japan's economy contracted by 0.5 percent in the third quarter of 2023 as tepid consumption and exports dampened activity, according to Cabinet Office data released on Wednesday.

The decline was worse than the market forecasts of 0.1 percent. It followed two consecutive quarters of growth, marking a reversal from the previous quarter's downwardly revised 1.1 percent growth, initially reported as 1.5 percent.

Gross domestic product contracted at an annualized rate of 2.1 percent, falling short of market forecasts of a 0.4 percent shrinkage at a 0.6 percent decline. This figure shows a downward trend from a revised 4.5 percent increase in the second quarter, from the initial record of 4.8 percent. This is raising concerns about the country's economic resilience.

Capital expenditures declined by 0.6 percent, falling short of expectations for a 0.3 percent increase, marking a further contraction from the 1.0 percent drop recorded in Q2.

Japan's private consumption remained stagnant. Overall private demand, which includes private residential and corporate investment, also declined by 0.6 percent.

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"The biggest drag on activity came from stock building, which subtracted 0.3%-pts from GDP growth last quarter. Even so, it's worth noting that there was a concurrent, broad-based decline in private demand," said Marcel Thieliant, head of Asia-Pacific coverage at Capital Economics.

On a positive note, its exports increased 0.5 percent. However, this figure sharply contrasts the 3.9 percent growth recorded in the preceding quarter. The slower growth in exports was attributed to a decline in chip and steel shipments to China.

Meanwhile, imports rose by one percent, pushing net exports down and contributing to a lower overall GDP growth figure.

The increase in exports in Q3 is mainly driven by strong demand for hybrid vehicles and mining and construction machinery in the U.S., pushing U.S.-bound shipments to their highest value on record at 8.4 percent in the year to October.

However, exports to China, Japan's largest trading partner, declined by 4.0 percent year-on-year in October. This marks the 11th consecutive month of decline.

Japanese manufacturers anticipate a 0.5 percent increase in core orders during the fourth quarter, following a 1.8 percent decline in the previous quarter, according to a survey conducted by the Cabinet Office.

BoJ to retain current monetary policy

The latest economic data indicate that Japan's economy is still falling behind its global counterparts. This lackluster performance may prompt the Bank of Japan (BoJ) to maintain its loose monetary policy for extended periods.

BoJ Governor Kazuo Ueda has previously discussed plans to gradually unwind the central bank's ultra-loose monetary policy stance sometime next year.

At the same time, Ueda mentioned that the central bank will keep its current stance until there are clearer signs of a self-sustaining cycle of wage growth, price increases and economic expansion.

As inflation continues to rise, this stance has added to pressure on the yen. According to Japan Today, it is one of the world's worst-performing major currencies in 2023. As of writing, it stood at 151.40 against the U.S. dollar.

Ueda has suggested that Japan is inching closer to achieving the two percent inflation target, a crucial benchmark for policy normalization. This has sparked speculation about the possibility of an earlier policy shift.

Prime Minister Fumio Kishida introduced a 17 trillion yen stimulus package earlier this month to support economic growth and ease inflationary pressures. This plan includes tax cuts of 40,000 yen per person and 70,000 yen cash handouts for low-income households, building upon previous pandemic-related economic injections totaling hundreds of billions of dollars over three years.