© Reuters. Japan’s economy takes a sharp turn! GDP shrank by 2.1% year-on-year in the third quarter. What should the Bank of Japan do?
Investing.com – The latest data released on Wednesday (15th) showed that Japan’s economy shrank more than expected in the third quarter as high inflation and a weak yen curbed private spending while Japan’s largest exports Demand at destinations also deteriorated.
Economy shrinks for first time in three quarters
Preliminary data from the Japanese cabinet showed that in the three months ended September 30, the economy shrank by 0.5% from the previous quarter, a larger than expected contraction of 0.1%, and a sharp slowdown from the 1.1% growth in the previous quarter.
Compared with the same period last year, Japan’s economy shrank by 2.1%, much higher than the expected decline of 0.6%, and a sharp reversal from the 4.5% growth in the previous quarter.
It was Japan’s first GDP contraction in three quarters, a sign that the economy may be slowing after strong growth earlier this year.
The contraction was mainly driven by a sharp deterioration in private demand, with household spending, retail consumption and private investment slowing amid relatively high inflation and a weaker yen. Among them, private consumption accounts for more than half of the Japanese economy and fell by 0.2% this quarter.
Meanwhile, Japan’s consumer inflation rate has been above the Bank of Japan’s 2% target for nearly two years due to rising import costs, labor shortages and relatively high wages.
Bank of Japan may find it difficult to exit dovish policy
The Bank of Japan also predicted higher inflation at its most recent meeting. However, given the sharp slowdown in Japan’s economic growth, the possibility of the Bank of Japan exiting its extremely dovish and heavy stimulus policy may now be problematic. It was previously expected that sticky inflation would prompt the Bank of Japan to eventually gradually abandon its extremely dovish stance.
However, Bank of Japan Governor Kazuo Ueda has previously emphasized the need to maintain loose policy, at least until the economy is strong enough to stimulate wage growth and thereby push up inflation.
Japan’s exports are slowing down, especially in its largest export market.
On the other hand, Japanese government spending remained sluggish throughout the quarter, while a widening trade deficit also weighed on the economy as Japan’s exports slowed and imports remained stable.
The slowdown in Japan’s largest export market, especially China, has also spread domestically, hitting mainly export-oriented companies such as auto and electronics makers. A slowdown in China’s economy is also expected to keep exports moderate in the coming months.
Japan’s heavy reliance on food and fuel imports has also hampered economic growth in recent years, especially as geopolitical unrest has pushed up import prices.
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Compiler: Liu Chuan