The shrinking of Japanese economy

Japan's struggle to recover from the pandemic shock continues. An update.

 The shrinking of Japanese economy

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• The story: The pandemic has truly extracted its price. Japan's economy contracted much faster than expected in the third quarter, facing global supply disruptions that hit exports and also business spending. In parallel, new COVID-19 cases ruined consumer mood, and undermined efforts to stoke a virtuous growth cycle.
• Exports engine: Japan is a huge exporter. Many expected the third-largest world economy to rebound as virus curbs eased, but worsening global production bottlenecks posed new risks. The contraction was bigger than expected due to supply-chain constraints, that hit car output and capital spending.
• The numbers: The Q3 GDP annualised grew at -3.0% vs a forecast of -0.8%. Declines in exports, capex, consumption hurt economy in Q3. The economic outlook in Q4 likely brighter but growth seen slow. On a quarter-on-quarter basis, Japan's GDP fell 0.8% compared with market forecasts for a 0.2% decline. Sluggish consumption, risks to global economy have clouded outlook. Japan had a really bad year, due to the Covid cris overshadowing government efforts to stage a grand Olympics festival, which further fractured political opinion and cast a deep shadow on the Prime Minister, who had to eventaually leave.
• US not doing too bad: The weak Japan GDP numbers contrast with more promising ones from other advanced countries such as the United States, where the economy expanded 2.0% in the third quarter on strong pent-up demand. In China, factory output and retail sales unexpectedly rose in October, despite supply shortages and new COVID-19 curbs. Japan's heavy dependence on the auto industry meant its economy was more vulnerable to trade disruptions than other countries. Automakers make up a large part of Japan's manufacturing sector with a wide range of subcontractors directly affected.
• Big stimulus: The new Prime Minister Fumio Kishida announced plans to compile a large-scale economic stimulus package worth "several tens of trillion yen". Experts were sceptical about its impact on growth near-term. The package will feature a plan to urgently strengthen the chip industry while the government will also formulate a strategy for storage batteries, key to the green and digital growth areas.

1. The package will likely be a mixed bag of near-term and long-term growth measures, and the focus may be blurred, so it won't have much impact near-term.
2. Consumption fell 1.1% in July-September from the previous quarter after a 0.9% gain in April-June. Capital expenditure also decreased 3.8% after rising a revised 2.2% in the previous quarter. Domestic demand shaved off 0.9% point to GDP growth. Exports lost 2.1% in July-September from the previous quarter as trade was hurt by chip shortages and supply-chain constraints.
3. Japanese firms face risks from higher commodity costs and supply bottlenecks, which threaten to undermine the economic outlook over the short- to mid-term.

• Future: Real GDP, which factors in the effects of inflation, won't return to pre-pandemic levels until the second half of 2023. China's slowdown, supply constraints, rising energy prices and a slowdown in inflation-hit Western countries will reduce the pace of growth towards mid-2022.
• EXAM QUESTIONS: (1) Explain the rise of Japan through the second half of 20th century. What model did it follow? Explain. (2) What are the three major challenges that Japan now faces in the post-Covid recovery phase? Explain. (3) A fresh stimulus may or may not impact Japan's economic prospects. Do you agree? Explain.

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