Japan’s economy sinks into contraction as spending, investment decline

In the July-September period, Japan experienced a significant economic downturn, with a 2.1% annual contraction reported by the government. This decline was primarily due to decreased consumer spending and investment. Despite being the world’s third-largest economy, Japan faced challenges due to stagnant wage growth. The contraction equated to a 0.5% drop in quarterly terms, marking a sharper downturn than anticipated.

Consumer spending saw a slight annualized reduction of 0.2%, while corporate investment fell by 2.5%. Marcel Thieliant from Capital Economics predicts a deceleration in GDP growth from 1.7% in the current year to just 0.5% in 2024, citing weak investment and demand globally.

Contrasting this decline, Japan’s economy had previously shown growth, with a revised 4.5% increase in the April-June period and a 3.7% rise in January-March. Initially, the April-June growth was estimated at 6%.

The recent quarter’s performance significantly underperformed expectations. ING had predicted only a 0.5% annual contraction. Robert Carnell of ING attributed the larger-than-expected decline to weaker domestic demand, including lower consumer spending, business investment, and inventory build-up.

In response to the economic challenges, Prime Minister Fumio Kishida announced a stimulus package exceeding 17 trillion yen (about $113 billion). This package aims to alleviate the struggles of low-income families through tax cuts and benefits, especially amid rising prices and a weakening yen due to global inflation.

Earlier economic boosts came from the revival of inbound tourism and exports, as COVID-19 related restrictions were lifted, enabling more travel and smoother trade and supply chains.

Despite the general downturn, exports saw a marginal growth of 0.5% in the latest quarter, a decrease from the 3.2% growth in the second quarter. Notably, auto exports rebounded after being hampered by shortages of components like computer chips.

Public demand, encompassing government spending, increased at an annual rate of 0.6% in the recent quarter.

Given these economic conditions, Japan’s central bank is unlikely to raise interest rates. The Bank of Japan has long maintained a highly accommodative monetary policy with zero or negative interest rates to combat deflation and stimulate an economy challenged by an aging and diminishing population.