Growth in Japan’s economy ground to a near standstill in the third quarter, at its weakest in a year, as the U.S.-China trade war and soft global demand knocked exports and kept pressure on policymakers to ramp up stimulus in order to bolster a fragile recovery.
Private consumption also cooled from the previous quarter, casting doubt on the Bank of Japan’s view that robust domestic demand will offset the impact from intensifying global risks.
In the third quarter the world’s third-largest economy grew an annualized 0.2 percent, slowing sharply from a revised 1.8 percent expansion in April to June, according to preliminary gross domestic product data released by the government Thursday.
It fell well short of a median market forecast for a 0.8 percent gain, and marked the weakest growth since a 2.0 percent contraction in the July-September period last year.
“Domestic demand had made up for some of the weakness in external demand, but we can’t count on this to continue,” said Taro Saito, executive research fellow at NLI Research Institute.
“A contraction in October-December GDP is a done deal. The economy may rebound early next year, but will lack momentum.”
The disappointing data may heighten calls from lawmakers for the government to boost fiscal spending to support the economy, which many fear will take a hit from a sales tax hike that took effect in October.
Private consumption grew 0.4 percent in the July-September period, slowing from a 0.6 percent increase in the previous quarter despite stronger demand from households that sought to beat the October tax hike.
The gain in private consumption was less than a quarter of the size of the bump that preceded the last sales tax increase in 2014. That suggests Japan’s economy will suffer less damage from this hike than five years ago, when a boom in consumption was followed by a bust that triggered a 7.3 percent economic contraction in the following quarter.
Capital spending, a rare bright spot in the economy, rose 0.9 percent in the third quarter, accelerating from the previous three months. That helped domestic demand add 0.2 percentage point to growth.
But external demand knocked 0.2 percentage point off GDP growth as exports were hit by the protracted China-U.S. trade war, which has upended world supply chains and hurt the global economy.
Markets have been on edge in the past month as the United States and China seek to complete an initial trade deal to de-escalate their bitter tariff row.
U.S. President Donald Trump on Tuesday dangled the prospect of completing the initial deal with China “soon,” but has so far offered no new details on the negotiations.
The dispute has already hit big exporters hard. Last month electronic giant Panasonic Corp. reported a 12 percent drop in its second-quarter operating profit due to slumping sales of electric components to factory owners.
Moreover, worsening ties with South Korea had “a big impact” on already weak exports, Economy Minister Yasutoshi Nishimura told reporters after the GDP data release. “Exports will remain weak due to slack demand for cars and electronics parts. In addition, declines in tourists from South Korea are having large negative effects,” he said.
Relations between South Korea and Japan began to deteriorate late last year following a diplomatic row over compensation for wartime forced laborers during Japan’s occupation of Korea. The dispute has spilled into trade, with Tokyo having put restrictions on exports of semiconductor materials to South Korea — Japan’s No. 3 trading partner.
Spending by inbound tourists, which is counted as part of exports in GDP data, was crunched by sharp declines in the number of Korean tourists in August and September. Exports to the country tumbled 16 percent in September, dragged down by shipments of cars, TVs, computers and semiconductor production equipment.
While the economy is likely to continue recovering moderately, the government will be vigilant to the impact from global risks and the sales tax hike, Nishimura said.
“The fundamentals underpinning consumption remain firm. But consumer sentiment is weak, so we need to keep an eye on developments,” he added.
The data comes as the government plans to compile a package of measures for disaster relief and to protect the economy from heightening global risks.
The BOJ kept monetary policy steady last month but signaled its readiness to maintain or even cut already low interest rates to underpin a fragile recovery.
Prime Minister Shinzo Abe’s administration proceeded with a twice-delayed sales tax hike to 10 percent from 8 percent in October as part of efforts to fix Japan’s tattered finances.
Government officials say the hit to growth from the tax hike will be smaller than the previous increase, to 8 percent from 5 percent in 2014, because of measures the administration has already taken to ease the impact on households.
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