Japan: Economy contracts most since Q1 2022 in Q3
According to a preliminary estimate, GDP fell 2.1% in seasonally adjusted annualized rate (SAAR) terms in the third quarter, below the 4.5% expansion tallied in the second quarter and substantially undershooting market expectations. Q3’s reading marked the worst result since Q1 2022. On an annual basis, economic growth waned to 1.2% in Q3, compared to the previous period’s 1.7% expansion.
The contraction was caused by cooling exports growth and falling fixed investment. Exports of goods and services increased 2.1% on a SAAR basis in Q3, decelerating as expected from the blockbuster 16.7% expansion seen in Q2. In addition, imports of goods and services rebounded, growing 4.2% in Q3 (Q2: -14.5% SAAR). Fixed investment contracted 2.1% in Q3, marking the worst reading since Q1 2022 (Q2: -1.4% SAAR).
Household spending fell 0.2% in the third quarter, which was a significant improvement from the second quarter’s 3.5% contraction. Market analysts had expected a rise, with the decline likely due to the recent rise in inflation affecting household finances more than anticipated. Meanwhile, government consumption picked up to a 1.2% increase in Q3 (Q2: +0.1% SAAR).
Our panelists expect GDP to rebound in Q4, with both private consumption and fixed investment projected to gain momentum from Q3. However, the rebound is anticipated to remain weak; recent figures from the Bank of Japan (BOJ) show that demand finally caught up with supply in Q2 after lagging behind for several quarters. This equilibration means catch-up growth from the pandemic has largely been exhausted.
Nomura analysts commented on the implications for fiscal and monetary policy:
“When looking at the details for Jul–Sep, we are struck by the weak growth in domestic demand, and in private-sector domestic demand in particular, and we think this result provides justification for the Kishida Cabinet to substantially overhaul its macroeconomic policies and for Kazuo Ueda’s BOJ to maintain its current monetary policy framework.”
Analysts at Goldman Sachs said:
“We set our initial real GDP tracking estimate for 2023Q4 at +1.8%: The first estimate of 2023Q3 real GDP growth mainly reflected the negative contribution from consumption, with weak private demand standing out. For 2023Q4, although we expect consumption and capex to rebound, we keep our forecasts unchanged (consumption: +0.5%, capex: +2.0%), as the recovery is unlikely to retrace the decline for two straight quarters.”