Japan’s economy is shrinking more than expected as supply shortages hit

Pedestrians wearing protective masks, after the outbreak of coronavirus (COVID-19), make their way during commuting in a business district in Tokyo, Japan, January 7, 2021. REUTERS / Kim Kyung-Hoon / File Photo

  • Q3 GDP annualized -3.0% vs. expected -0.8%
  • Decline in exports, capex, consumption damaged the economy in the 3rd quarter
  • Economic prospects in the 4th quarter probably brighter, but growth seen slowly
  • Low consumption, risk of global economy cloud outlook

TOKYO, Nov. 15 (Reuters) – Japan’s economy contracted much faster than expected in the third quarter as global supply disruptions hit export and business spending plans and recent COVID-19 cases hurt consumer sentiment.

While many analysts expect the world’s third-largest economy to recover in the current quarter as virus dampers decline, deteriorating global production bottlenecks pose an increasing risk to export-dependent Japan.

Read also: BOJ’s Kuroda estimates that inflation will approach 1% by the middle of next year

“The contraction was far greater than expected due to restrictions in the supply chain, which hit car production and capital spending hard,” said Takeshi Minami, chief economist at the Norinchukin Research Institute.

“We expect the economy to pick up again this quarter, but the pace of recovery will be slow as consumption did not get off to a good start even after the covid-19 curbs were eased in late September.”

The economy shrank by 3.0% year-on-year in July-September after a revised increase of 1.5% in the first quarter, preliminary data for gross domestic product (GDP) on Monday showed much worse than a median market forecast for a decline of 0.8% .

Weak GDP contrasts with more promising results from other advanced nations such as the United States, where the economy grew by 2.0% in the third quarter due to strong subdued demand.

In China, factory production and retail sales rose unexpectedly in October, data from Monday showed, despite supply shortages and recent COVID-19 attenuations.

On a quarter-on-quarter basis, GDP fell by 0.8% compared to market forecasts for a decline of 0.2%.

Some analysts said that Japan’s heavy dependence on the car industry meant that the economy was more vulnerable to trade disruptions than other countries.

Shinichiro Kobayashi, chief economist at Mitsubishi UFJ Research and Consulting, said that automakers make up a large part of Japan’s manufacturing sector with a wide range of subcontractors directly affected.


Prime Minister Fumio Kishida plans to draw up a large-scale economic stimulus package worth “tens of trillions of yen” on Friday, but some economists were skeptical of its short-term impact on growth.

“The package is likely to be a mixed bag of short-term and long-term growth measures, and the focus may be blurred, so it will not have a big impact in the short term,” said Norinchukin’s Minami.

Consumption fell 1.1% in July-September from the previous quarter after an increase of 0.9% in April-June.

Investments also fell by 3.8% after rising the revised 2.2% in the previous quarter.

Domestic demand shaved off 0.9 percentage points to GDP growth.

Exports lost 2.1% in July-September from the previous quarter when trade was damaged by chip shortages and supply chain restrictions.

Analysts polled by Reuters expect Japan’s economy to grow by 5.1% year-on-year in the current quarter, as consumer activity and auto production pick up.

However, Japanese companies still face risks from higher raw material costs and supply bottlenecks, which threaten to undermine the economic outlook in the short to medium term.

Real GDP, which takes into account the effects of inflation, will not return to pre-pandemic levels until the second half of 2023, said Takahide Kiuchi, a former board member of the Bank of Japan who now serves as chief economist at the Nomura Research Institute.

“China’s decline, supply constraints, rising energy prices and a decline in inflation-hit western countries will slow the pace of growth towards mid-2022,” Kiuchi said.

“As exports remain severe, Japan’s economy is likely to experience moderate growth of around 1% -2% annualized in the second quarter and beyond, even in terms of stimulus effects.”

Reporting by Daniel Leussink, Tetsushi Kajimoto and Kantaro Komiya; Edited by Sam Holmes

Our standards: Thomson Reuters Trust Principles.

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