The annualized 1.2 percent fall in Japan’s gross domestic product in the July-September period is widely deemed to be the product of a series of major natural disasters that hit the country this summer, which dragged down both domestic demand and exports. The resiliency of the economy will be tested in the current quarter to December. Optimism is unwarranted, however, over the course of the economy in the coming months as caution lingers over the impact that the intensifying trade war between the United States and China will have on global growth. The third-quarter GDP dip may be no cause for alarm, but we should still be on guard against a possible downturn.
The first GDP contraction in two quarters was the sharpest in two years and nine months. Personal consumption, which accounts for 60 percent of this nation’s GDP, fell 0.1 percent from the previous quarter (when it expanded 0.7 percent), while capital investment by businesses dropped 0.2 percent for the first decline in eight quarters.
The series of big natural disasters — the torrential rains that caused landslides and flooding in broad areas of western Japan in July and claimed the lives of more than 200 people, the powerful typhoon that crippled Kansai International Airport in early September and the subsequent big earthquake that hit southern Hokkaido — not only dampened consumer sentiment but also hampered exports by temporarily halting the operation of manufacturing plants.
The disasters also had a negative impact on inbound tourism, with the number of visitors in September falling 5.3 percent for the first decline in more than five years. The reduced consumption by the inbound travelers — which is counted as exports — contributed to the 1.8 percent decline in exports in the July-September period, the first fall in five quarters.
Government officials and many economists say the GDP fall in the July-September period came as no surprise, coming on the heels of robust 3.0 percent growth in the previous quarter and the summer disasters, and they are confident that GDP growth will return to positive territory in the October-December period once the impact of the disasters dissipates. But given the growing uncertainty over the world economy and the weakness in consumer demand at home, a quick return to the recovery track — much less steady growth in the months ahead — should not be taken for granted.
In the Bank of Japan’s latest tankan survey in September, the business sentiment of larger manufacturers turned for the worse for the third-straight quarter — the first time this has happened since the global recession through 2009. Last month, the International Monetary Fund revised its world economic forecast downward for the first time in two years, pushing its estimate of global growth in 2019 down to 3.7 percent, 0.2 percent lower than in a July forecast, and called the U.S.-China trade war a primary threat to the world economy.
The volume of U.S.-China trade that has been mutually targeted by punitive tariffs by the two countries has reached $360 billion, or some ¥41 trillion, and the IMF warns that the escalating trade war between the world’s largest and second-largest economies, in a worst-case scenario, could push down global GDP by 0.8 percent. Slower growth in the world’s economies would hurt the external demand that has shored up Japan’s exports, the expansion of which have sustained the nation’s extended boom cycle. Listed companies reportedly expect their combined net profits in the year to next March to fall 2 percent for the first decline in three years.
A sustained increase in personal consumption holds the key to a more domestic demand-driven growth of Japan’s economy. The growth in consumer spending, however, remains uneven and fragile since the last consumption tax hike to 8 percent in April 2014 — a source of concern as the government prepares to bump up the tax to 10 percent next October. Total consumer spending in the April-June quarter this year remained lower than the figure in January-March 2014, just before the last consumption tax increase.
Per household spending in September fell 1.6 percent from a year earlier on a real-term basis — the first decline in three months. There are views that the underlying trend of consumer spending is weak as growth in wages remains slower than the rise in prices. In September, wages fell 0.4 percent from a year ago on a net, inflation-adjusted basis for the second month of decline in a row. More significant wage hikes by Japanese companies remain crucial to realizing robust growth in personal consumption.
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