World Economy

Japan Relapses Into Recession

Japan Relapses Into RecessionJapan Relapses Into Recession

Japan joins the eurozone in feeling the chill from China. Japan’s economy contracted in the third quarter on sluggish business investment, confirming what many economists had predicted: The nation fell into its second recession since Prime Minister Shinzo Abe took office in December 2012.

Gross domestic product declined an annualized 0.8% in the three months ended September 30, following a revised 0.7 drop in the second quarter, the cabinet office said Monday in Tokyo. Economists had estimated a 0.2% decline for the third quarter, Bloomberg reported.

Weakness in business investment and shrinking inventories contributed to the contraction amid concerns over slower growth in China and global economy that prompted Japanese companies to hold back on spending and production. While growth is expected to pick up in the current quarter, the GDP report could put pressure on Abe and Bank of Japan Governor Haruhiko Kuroda to boost fiscal and monetary stimulus. The BOJ holds a policy meeting later this week.

“Japan’s economy is in a soft patch, and even though it may rebound in the coming months, the momentum will probably be very weak,” Atsushi Takeda, an economist at Itochu Corp. in Tokyo, said before the report. “The government will probably have no choice but to take action to stimulate the economy, and pressure for additional monetary easing will likely build up again.”

Investment Wanes

Businesses in the third quarter reduced investment, in a rebuff to Abe’s call for Japanese companies to put more of their record cash holdings into capital spending. From the previous quarter, business investment fell 1.3% in the July-September period, following a revised 1.2% contraction, according to the report.

“Japan’s economy was weak, led by weakness in China,” said Daiju Aoki, an economist at UBS Group AG. in Tokyo. “Companies are still wondering whether the economy is resilient enough to increase investment, so domestic demand wasn’t strong enough to offset the weakness from abroad.”

Evidence of another recession, since he took office–the earlier one was in 2014 after the sales tax was increased–isn’t good news for Abe, who has made bolstering the economy a priority and advocated for reflationary policies that weakened the yen and boosted corporate profits.

Yen Strengthens

The yen strengthened after the data was announced and was up 0.2% at 122.31 per dollar in Tokyo.

In a string of somber economic reports in the past few months, Kuroda’s core price gauge fell, household spending unexpectedly dropped, vehicle production declined, retail sales slipped and imports fell while exports stagnated. One bright spot: Industrial output advanced 1.1% in September from the previous month, yet wasn’t enough to make up for contractions in July and August.

“Business spending will be unlikely to pick up soon,” Itochu’s Takeda said. “Japanese companies are holding off spending as there’s still uncertainties over global demand resulting from China’s slowdown.”

Abe has told Economy Minister Akira Amari to compile measures this month to help achieve his goal of expanding Japan’s nominal GDP by 20% to 600 trillion yen ($4.88 trillion) over five years.

Amari said Friday he isn’t assuming an extra budget to fund measures purely focused on boosting growth at the moment, and the funding may be used to help address Japan’s demographic issues and to help alleviate the effects of the Trans Pacific Partnership trade pact.

Japan's economic contraction in July-September was due more to declining inventory than weakness in private demand, a senior International Monetary Fund official said on Monday, adding that it was too early to determine whether additional monetary or fiscal stimulus steps were needed, Reuters reported.

"My reading of (Monday's GDP data) ... is that the headline is worse than the details," said Gian Maria Milesi-Ferretti, deputy director of the IMF's Research Department.

"We're going to have to see how the indicators point to for the rest of the year before arguing that there is a need for action by authorities," he told a seminar in Tokyo.