Japan: Economy contracts sharply at the end of 2019
February 17, 2020
The economy contracted 6.3% in Q4 compared to the previous quarter in seasonally-adjusted annualized terms. This contrasted the 0.5% expansion in Q3, marked the worst reading in five-and-a-half years and undershot market analyst expectations of a more modest 3.7% contraction. In year-on-year terms, the economy shrank 0.4% in Q4 (Q3: +1.7% year-on-year).
In seasonally-adjusted annualized terms, private consumption plummeted 11.0% in Q4, contrasting the 1.9% increase in Q3. The increase in Japan’s consumption tax from 8.0% to 10.0% in October led to a front-loading of spending before the measure took effect and partly explains Q4’s miserable result. Moreover, the devastation left by Typhoon Hagibis in October will have had a depressive effect on spending. Turning to other GDP components, government consumption growth slowed to 0.9% in Q4, down from 3.0% in Q3; meanwhile, fixed investment shrunk 9.9%, contrasting 2.9% growth in Q3, as business confidence among large manufacturers fell to a nearly seven-year low.
On the external front, exports dropped 0.4% in Q4, after decreasing 2.8% in Q3, as global demand for Japanese goods and services proved downbeat. Imports slid 10.1% in Q4, contrasting growth of 2.8% in Q3, as domestic demand dropped. All in all, the external sector contributed 1.9 percentage points to economic growth in Q4, after detracting 1.0 percentage point in Q3.
Turning to the beginning of this year, the economy will likely be buffeted by weak demand from China following the country’s coronavirus outbreak. Robert Carnell, chief economist of Asia-Pacific research at ING, said “recession looks unavoidable” in Japan as “the current fiscal stimulus program, although substantial, basically only offsets the negative impact of last year’s consumption tax hike.” Expanding upon this point, Carnell noted: “Some further government spending may help to curb any further contraction in GDP beyond [Q1 2020]. But that will not stop what started off as a technical downturn, from evolving into a full-blown recession.”
Author: Edward Gardner, Economist