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Japan’s GDP contracted for the first time in four quarters declining by 2.9% year-on-year between July to September 2023, surpassing the 2.1% contraction reported for the same period last month.
Economists had projected a 2% contraction for the revised data. During the same period, the country’s economy witnessed a 0.7% quarterly fall. In the preceding quarter, the country’s economy exhibited a year-on-year growth rate of 4.8%.
The latest contraction in Japan’s GDP indicates the challenges within the country’s economy, influenced by factors like escalating inflation and diminishing demand. Over several decades, Japan struggled with deflation. However, similar to numerous global economies, it witnessed a surge in prices following the onset of the Ukraine war in February 2022.
As of October 2023, Japan has surpassed the Bank of Japan’s (BoJ) 2% inflation target for 19 consecutive months. However, inflation-adjusted real wages dropped 2.3% year-on-year during this period. Along with this, between July to September, private consumption contracted by 0.2%, quarter-on-quarter, coupled with a 0.4% shrinkage in corporate investments.
“Although third-quarter GDP was revised down unexpectedly, the improved current account and cash earnings suggest a rebound in growth in the current quarter,” says ING
“The largest revision came from private consumption…and the inventory contribution to GDP, which was down by 0.2% ppt…We think that weaker-than-expected GDP could justify the Bank of Japan’s current easing policy, at least for now,” it adds.
Japan GDP to benefit from new stimulus package?
Japan announced a new stimulus package worth over 17 tn yen ($113 bn) in November, to combat challenges arising from inflation.
A key highlight of the plan involves substantial income and residential tax cuts, amounting to around 3.5 tn yen ($23.22 bn). Additionally, the government will earmark over one tn yen ($6.63 bn) to bolster low-income households, aiming to stimulate overall consumption.
This equates to a short-term tax reduction of 40,000 yen ($265.42) per individual starting from June of 2024. Additionally, there will be disbursements of 70,000 yen ($464.49) to every low-income household, with support in the form of subsidies for gasoline and utility expenses.
Yesterday, Bank of Japan (BoJ) Governor Ueda stated, “Japan’s economy to continue recovering moderately, supported mainly by accommodative financial conditions and effects of economic stimulus measures.” However, he cautioned that uncertainty over Japan’s economy is extremely high.
Nomura Research Institute also expressed concerns over Japan’s economic situation. “…although income tax cuts and benefits, including benefits to low-income households, reach a total of 5 tn yen, the effect of pushing up real GDP is limited to +0.19%, and the cost-effectiveness is generally small,” writes Tohide Kiuchi, Executive Economist at Nomura Research Institute.
“…while the government’s economic measures are not expected to have a significant effect, high prices, and declining real wages will continue to be a headwind for personal consumption next year, and disappointment with the wage increases resulting from the spring labour unions will likely lead to a downturn in personal consumption,” he adds.
All in all, the International Monetary Fund (IMF) projects a 2% growth in Japan’s GDP for 2023, an increase from 1.7% in the previous year. Moreover, consumer prices are anticipated to reach 3.2%, surpassing the BOJ’s target.
