Japanese Economy Shrinks On Natural Disasters

November 14, 2018 – Japan’s economy shrank at an annualized rate of 1.2 percent in the July-September quarter as natural disasters weighed on activity, government data showed today.

The weak reading for real gross domestic product, the total value of goods and services produced in the country adjusted for inflation, puts the country at risk of slipping into a recession, though economists expect a rebound in the October-December period.

“This does not change our view that the economy is recovering moderately,” Toshimitsu Motegi, the minister in charge of economic and fiscal policy, told a press conference.

The preliminary reading from the Cabinet Office followed a revised contraction of 1.1 percent in January-March and 3.0 percent growth in April-June. It compares with a contraction of 1.1 percent forecast by economists in a Kyodo News poll.

On quarter, the world’s third largest economy shrank 0.3 percent after torrential rains claimed more than 200 lives in western Japan, a powerful typhoon shut down Osaka’s main airport and an earthquake caused a massive blackout in Hokkaido.

Private consumption, which accounts for more than half of the Japanese economy, was down 0.1 percent as spending on hotels, eating out and air travel fell. Higher vegetable prices also led households to tighten their purse strings.

Exports dropped 1.8 percent, the first decline in five quarters, as overseas demand for automobiles and technology products softened. Spending by inbound tourists, which is statistically chalked up as exports, also suffered due to the natural disasters.

Capital expenditure, which had been strong on the back of robust corporate profits and a construction boom ahead of the 2020 Tokyo Olympics, fell for the first time in two years, slipping 0.2 percent.

Public investment dropped by 1.9 percent while residential investment increased by 0.6 percent.

In nominal terms, or unadjusted for inflation, GDP fell an annualized 1.1 percent and 0.3 percent on quarter.

But the economy is likely to return to growth in the October-December period as the impact of the disasters fade, said Kazuma Maeda, an analyst at Barclays Securities Japan. That would prevent a fall into recession, technically defined as two consecutive quarters of contraction.

“Exports continue to increase on the back of a strong overseas economy and the capital expenditure cycle remains in an expansionary phase. Firms will be looking to make up for lost time after the lull this summer,” Maeda said.

“That said, we also caution against the downside risks to the economy, such as slower exports stemming from the U.S.-China trade conflict,” he said.

The Cabinet Office is scheduled to release revised July-September GDP data on Dec. 10.

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