Japan’s Q3 contraction worse than expected

TOKYO: Japan’s economy shrank at an annual rate of 2.5% in the July-September quarter, downgraded to the sharpest contraction in more than four years as a string of natural disasters weighed on capital expenditure, government data showed yesterday.

The Cabinet Office had initially reported that real gross domestic product, the total value of goods and services produced in the country adjusted for inflation, shrank 1.2% in the third quarter of 2018.

It is the sharpest contraction since a 7.3% shrinkage logged in the April-June quarter in 2014, when the world’s third-largest economy lagged under an increase in the consumption tax, and compares with a contraction of 2.1% forecast by private-sector economists in a Kyodo News poll.

Quarter-on-quarter, GDP shrank a real 0.6%, downgraded from the earlier reading of a 0.3% contraction.

Natural disasters in September including Typhoon Jebi, which tore through western Japan and temporarily shut down Osaka’s main airport, and a magnitude 6.7 earthquake that triggered an island-wide power outage in the northern region of Hokkaido, dampened spending by businesses such as retailers and technology firms.

Capital expenditure fell 2.8% from the previous quarter, sharply downgraded from a 0.2 decrease, though this had been preceded by a nearly two-year-long growth streak on the back of robust corporate profits.

“While there was certainly the impact of the natural disasters, we expect the basic growth trend of capital expenditure to continue,” said a Cabinet Office official who briefed reporters.

Private consumption, which accounts for the majority of Japan’s economy, also suffered from the series of disasters and was slightly downgraded to a 0.2% fall from a 0.1% decline.

Public investment was downgraded to a 2.0% decrease from a 1.9% fall, while growth in private residential investment was slightly raised to 0.7% from 0.6%.

Exports were unchanged at a 1.8% fall. Nominal GDP, which is unadjusted for inflation, was downwardly revised to an annualized 2.7% contraction from a 1.1% shrinkage.

Economists said they expect the economy to be boosted by a rebound in domestic demand in the October-December quarter, though some expressed doubt over whether Japan’s economy would continue to grow through next year.

“Of course we can’t ignore the transitory impact of this summer’s natural disasters, but the underlying cause (of the weak GDP data) is the slowing of growth in exports and global trade as a whole,” said Takeshi Minami, chief economist at the Norinchukin Research Institute.

“Japan increasingly looks headed for a soft landing around the middle of fiscal 2019, and there is a possibility that the current expansionary phase will end,” he said.