Japan’s Smaller Contraction Masks Extent of Underlying Weakness

(Bloomberg) — Japan’s economy took a smaller hit than originally thought in a summer plagued by the new Covid outbreak and a fall in the yen, returning to expected growth this quarter.

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Domestic sales fell by 0.8% in the three months to the end of September from the previous period, updated figures from the Cabinet Office showed on Thursday. That was less than the 1.2% decline earlier and the 1% decline expected by economists.

The revised figures showed that strong exports offset the negative trade impact from the yen’s depreciation, and that corporate spending rose.

The increase in production also helped to reduce the recession, although this also indicated that there was insufficient demand for industry. It also showed that consumption was lower than previously thought in the wake of the Covid-19 pandemic and rising inflation.

Overall, the numbers did not do enough to allay concerns among policymakers about the health of the economy. Japan is approaching the end of the year and 2023 with clouds darkening the global outlook, as well as the economic potential of major foreign markets.

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“The decline worries me,” said Harumi Taguchi, chief economist at S&P Global Market Intelligence. “Spending has not increased significantly during this period, possibly due to inflation and further increases in the number of Covid-19 cases.”

What Bloomberg Economics Says…

“Most of the concerns about the decline in GDP in Japan in the third quarter are not encouraging. The increase in production that has helped to improve the upgrade will reduce production in 4Q.”

— Yuki Masujima, economist

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Prime Minister Fumio Kishida has already launched an economic stimulus package to tackle inflation that is expected to provide more support early next year. Analysts also expect the economy to return to expansion this quarter.

The Bank of Japan, meanwhile, is expected to keep interest rates unchanged in the final months of Governor Haruhiko Kuroda’s tenure.

However, analysts are worried about how the economy will be affected by the global recession due to the increased police presence of central banks elsewhere in the world. China’s caution to relax its virus restrictions offers one glimmer of hope in the coming months.

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“Foreign demand is also slowing, as we have seen in industrial production,” Taguchi said. “Things could change if China lifts its zero Covid policy, but for now Europe and the US are looking at the economic situation due to rising interest rates.”

Economists expect business spending and employment to support the economy this quarter. Slow demand from the summer of Covid has already fueled consumer spending, although the latest resurgence of infections could start to dampen gains. The government is expected to ease the country’s virus-related restrictions to boost economic activity.

Inflation is growing as another concern for spending and recovery. Inflation in Japan hit a 40-year high in October, and the pace may have hit a new high in November based on events in Tokyo last month, reflecting trends across the country.

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Kishida’s aid package provides relief from rising electricity prices and energy bills that are set to receive massive relief from early next year.

Business spending did not change as expected but it still showed resilience in corporate sentiment despite the yen’s slide which led to government intervention in the financial markets. A fall in the yen this summer may prompt companies to rethink their business plans.

However, the recent rebound in the yen may prove positive for businesses going forward and should also have a positive impact on net sales this quarter.

“Personally, I don’t think investment costs will decrease significantly,” said Toru Suehiro, an economist at Daiwa Securities. “I think investment spending will continue next year because of the pressure.”

Another interesting fact is that Japan reopened its borders to tourists in October. This offers the prospect of a return on investment for tourists as a result of cheaper travel costs for their hard-earned money.

(Adds financial commentary, more)

Information Read from Bloomberg Businessweek

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