The economy contracted in the third quarter on sluggish business investment, confirming what many economists had predicted: The nation fell into its second recession since Prime Minister Shinzo Abe took office in December 2012.
Gross domestic product declined an annualized 0.8 percent in the three months ended Sept. 30, following a revised 0.7 drop in the second quarter, the Cabinet Office said Monday. Economists had estimated a 0.2 percent decline for the third quarter.
Concerns about a Chinese-led slowdown apparently weighed on consumption, which accounts for around 60 percent of Japan’s GDP, and capital spending, raising the bar for Abe’s government to stimulate demand and steer the economy toward growth.
After a 0.6 percent fall in the previous quarter, private consumption gained only moderately by a real 0.5 percent on the back of increased sales of air conditioners due to hot summer weather and leisure-related spending over a long holiday weekend in the fall.
The government is urging companies to increase capital spending and raise wages for employees, as many Japanese companies have benefited from the yen’s weakness and reaped record profits.
Corporate capital spending, which the government sees as a key to shoring up the economy, slid 1.3 percent for the second straight quarterly decline as firms maintained a cautious stance amid a slowdown in emerging economies including China.
Economic and fiscal policy minister Akira Amari expressed confidence that the Japanese economy remained on a recovery trend despite some risks in overseas economies.
“The problem is that capital spending is not robust, which indicates that the mindset of company executives remains deflationary,” Amari told a news conference.
The focus is expected to shift to the crafting of an extra budget at the end of the year, aimed at helping farmers boost global competitiveness and finance social security measures.
“Japan’s economy is in a soft patch, and even though it may rebound in the coming months, the momentum will probably be very weak,” Atsushi Takeda, an economist at Itochu Corp. in Tokyo, said before the report. “The government will probably have no choice but to take action to stimulate the economy, and pressure for additional monetary easing will likely build up again.”
“Japan’s economy was weak, led by weakness in China,” said Daiju Aoki, an economist at UBS Group AG. in Tokyo. “Companies are still wondering whether the economy is resilient enough to increase investment, so domestic demand wasn’t strong enough to offset the weakness from abroad.”
Evidence of another recession since he took office — the earlier one was in 2014, after the first stage of the consumption tax hike — is not good news for Abe, who has made bolstering the economy a priority and pushed radical reflationary policies that weakened the yen and boosted corporate profits.
In a string of somber economic reports in the past few months, the Bank of Japan’s preferred core price gauge fell, household spending unexpectedly dropped, vehicle production declined, retail sales slipped and imports fell while exports stagnated. One bright spot: Industrial output advanced 1.1 percent in September from the previous month, yet was not enough to make up for contractions in July and August.
“Business spending will be unlikely to pick up soon,” Itochu’s Takeda said. “Japanese companies are holding off spending as there’s still uncertainties over global demand resulting from China’s slowdown.”
Abe has told Amari to compile measures this month to help achieve his goal of expanding Japan’s nominal GDP by 20 percent to ¥600 trillion over five years.
Amari said Friday that he is not assuming an extra budget will be to fund measures purely focused on boosting growth at the moment, and the funding may be used to help address Japan’s demographic issues and to help alleviate the effects of the Trans-Pacific Partnership trade pact, which is expected to hurt Japan’s farmers.