Japan’s economy shrank over the summer, pointing to the fragility of the country’s recovery in the face of uncertainties including currency weakness, prolonged inflation and a cloudy outlook overseas.

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Gross domestic product contracted at an annualized pace of 2.1% in the third quarter, largely on the back of falling business spending and higher imports that dragged on the economy, the Cabinet Office reported Wednesday. The contraction was deeper than economists’ estimate of a 0.4% shrinkage.

Wednesday’s data suggest that Japan’s economic recovery remains patchy, lagging behind its global peers. The lackluster economy may give the Bank of Japan a reason to delay any policy shift away from its massive monetary easing stance.

BOJ Governor Kazuo Ueda has maintained that the bank will stand pat until there are clearer signs that a virtuous cycle of wages, prices and growth is strengthening. Still, Ueda also recently hinted that Japan is making progress toward its 2% stable inflation target, a prerequisite for policy normalization, fueling speculation over a possible early shift.

The world’s third-largest economy also contracted 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 larger contraction than expectations for 0.1% contraction.

“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, Capital Economics’ head of Asia-Pacific coverage.

The weaker GDP print was partly driven by weaker than expected domestic capital expenditure, which contracted 0.6% in the third quarter from the second quarter — as opposed to expectations for a 0.3% expansion, according to the same government 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 grind to a standstill next year,” Thieliant added.

(With Inputs From Agencies.)

First Published:Nov 15, 2023 5:47 AM IST