Japan's Economy Faces Deeper Contraction in Q3 2023

Japan's economy experienced a sharper contraction than previously estimated in the third quarter of 2023, with the Cabinet Office reporting a revised annualized decline of 2.3%. This figure is a significant adjustment from the initial estimate of a 1.8% contraction and surpasses economists' median forecast of a 2.0% decline. On a quarter-on-quarter basis, GDP fell by 0.6%, compared to earlier estimates of 0.4% and 0.5%. The contraction was primarily attributed to a downward revision in capital spending, which fell by 0.2% instead of the initially reported 1.0% increase. Private consumption, which constitutes over half of the economy, showed a slight improvement, rising by 0.2% in the revised figures.

Japan's Q3 revised GDP widens contraction to annualised 2.3%Reuters

The contraction in Japan's GDP was influenced by several factors, including external demand pressures due to newly implemented U.S. tariffs, which formalized a baseline 15% tariff on nearly all Japanese imports. Additionally, domestic demand contributed negatively, shaving off 0.4 percentage points from growth, compared to a 0.2 percentage point impact in the initial release. Housing investment also contracted, reflecting tighter energy-efficiency regulations introduced in April.

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Despite the current downturn, economists anticipate a return to growth in the upcoming quarter, driven by a gradual recovery in private consumption. However, they caution that U.S. tariffs may continue to exert pressure on exports. Senior economist Masato Koike from Sompo Institute Plus noted that while demand for digital and labor-saving investments remains strong, deteriorating corporate earnings could moderate the pace of capital investment recovery.

ReutersJapan’s Economy Stumbles As GDP Shrinks More Than Expected

Economists have indicated that the revised GDP figures are unlikely to significantly alter the Bank of Japan's monetary policy decisions. Uichiro Nozaki from Nomura Securities stated, "Expectations for a rate hike in December have risen considerably," attributing this to strong prospects for upcoming wage negotiations. The Bank of Japan is expected to raise its policy rate during its meeting on December 18-19, with the government prepared to support this decision.

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The economic contraction has raised concerns about the effectiveness of current fiscal and monetary policies. Critics argue that persistent weakness in wages and consumer demand could hinder economic recovery and negatively impact corporate profits. The ongoing decline in real wages, which fell by 0.7% in October, underscores the challenges facing households amid rising costs.

Japan’s Economy Stumbles As GDP Shrinks More Than Expected

While the consensus among economists suggests a potential recovery in the next quarter, there are differing opinions regarding the impact of U.S. tariffs on Japan's export performance. Some analysts believe that the tariffs will significantly hinder growth, while others maintain that Japan's current account surplus may buffer some of the negative effects.

Japan’s Economy Stumbles As GDP Shrinks More Than Expected

• “The results wouldn't significantly change the overall assessment of the economy,” — Uichiro Nozaki, Economist, Nomura Securities

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• “As for capital investment, although demand for digital and labour-saving investment is strong, deteriorating corporate earnings will intensify downward pressure, so the pace of increase will likely remain moderate,” — Masato Koike, Senior Economist, Sompo Institute Plus

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