Japan economy shrinks worse-than-forecast on capex fall

Japan’s economy contracted more than initially projected in the third quarter, driven by the biggest drop in business spending in nine years amid a series of natural disasters. Growth is expected to recover in the current quarter and continue into next year, but trade tensions and a slowdown in China are major risks.

Japan’s gross domestic product shrank an annualised 2.5% in the three months through September, the largest fall in more than four years, the Cabinet Office said on Monday. That compares with an initial reading of -1.2%, and economists’ median estimate of -2%.

Key insights

Exports and related business investment have been key growth drivers for Japan in recent quarters. The weakness in capital spending followed the biggest rise in three years the previous quarter and economic expansion is thought to have now resumed.

Yet there are still concerns that the US-China trade war and slowing growth overseas, especially in China, will damp Japanese corporate sentiment.

The effect of the natural disasters on GDP was "quite significant," but it’s too early to draw any big-picture conclusions from the fall in capital spending given that the increase the previous quarter was so strong, said Toru Suehiro, senior market economist at Mizuho Securities in Tokyo.

"I do see exports and production getting weaker, and the economic growth trend is tilted toward weakness," Suehiro said.

What a Bloomberg economist says

'The good news is that 3Q is now well in the rear-view mirror. We think GDP is bouncing back this quarter," said Bloomberg Economics’  Yuki Masujima.

"The problem is that any recovery is likely to lack much strength. And the risks, especially to the exports, are on the rise, with trade tensions between the US and China heading in an unfavourable direction."

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