Japan’s economy entered into technical recession in the third quarter of the year as GDP shrank for the second consecutive quarter. GDP growth for the July-September quarter came in at -0.2% compared to the previous quarter, slightly worse than the consensus estimates of -0.1%. However, with second quarter growth revised up from -0.3% to -0.2% q/q and a projected rebound in the fourth quarter, there is little expectation that Japan’s economy is heading back towards a prolonged downturn.
The biggest drag on quarterly growth was a large fall in inventories, which shaved 0.5% from quarterly GDP growth. Business investment was also down, with capital expenditure declining by 1.3% in the third quarter, much worse than estimates of a 0.4% drop and follows a 1.2% decrease in the second quarter. Lacklustre growth in overseas markets and increased uncertainty in emerging market economies are likely to have dissuaded Japanese companies from increasing their spending and production levels.
A solid increase in private consumption helped offset some of the weakness from inventories and capital spending. Private consumption was up 0.5% from the second quarter and contributed 0.3% to third quarter GDP growth. Net exports also had a positive impact, adding 0.1% to GDP growth. However, weak wage growth and higher food prices could restrain future increases in private consumption, while weak overseas demand could dampen exports growth.
The Bank of Japan has so far resisted calls for further expansion of its already ultra-loose monetary policy despite acknowledging downside risks to the economy from slowing emerging market economies. Some analysts were expecting the Bank to repeat this October last year’s unexpected jump in the size of its asset purchase program but there were no surprises at last month’s policy meeting nor any signs of future easing.
The performance of the yen against the US dollar, the strength of overseas demand and the direction of commodity prices in the coming months are likely to play a role in the Bank of Japan’s decision making. A further deterioration in global trade and continued weakness in commodity prices would add significant downside pressure on Japanese growth and inflation. Meanwhile, some analysts are questioning whether the dollar can rise even further, especially if the US Federal Reserve signals in December a very gradual tightening cycle. The Japanese government could also surprise with a big boost in fiscal spending and is reportedly preparing a supplementary budget to support growth. A large fiscal stimulus would counter the need for the BoJ to announce any new stimulus of its own.
The dollar rose against the yen after the data to climb from a low of 122.22 to around 122.60 before drifting lower in late Asian trading. However, the greenback has rallied in European trading to break above the 123 handle and reach an intra-day high of 123.06 yen.
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