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Japan’s Economy Shrinks Unexpectedly, Hit by a Weak Yen and Rising Inflation

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Japan’s economy, the world’s third largest, contracted unexpectedly in the three months from July to September.

Government data show the economy contracted at an annualized rate of 1.2% in the third quarter, ending nine months of growth and the country’s recovery just as Japan was adjusting to life with coronavirus deregulation. has retreated.

Analysts had expected Japan’s economy to rise 4.6% over the past three months (corrected from an initial figure of 2.2%), returning to pre-pandemic size before expanding modestly.

However, as the yen fell sharply against the dollar to its lowest level since 1990, soaring import prices weighed on earnings.

Tuesday’s figures also showed Japan was still facing a further slowdown than expected due to Russia’s war in Ukraine, as well as domestic inflation, the highest in decades by some measures. A summer spike in infections, boosted by Omicron, also dampened the acceleration in Japanese consumer spending that began at the beginning of the year.

Still, negative consequences may be short-lived. Shinichiro Kobayashi, chief economist at Mitsubishi UFJ Research & Consulting, said the unexpected figure had a lot to do with the surge in prices for imported services, including advertising, and that the Japanese economy could return to growth next quarter. said to be high.

Saisuke Sakai, chief economist at Mizuho Research & Technology, said: There were also some positive signs in the data. Even though coronavirus infections hit a record high in August, domestic spending has held up better than previous waves, a sign the country is adjusting to life with the virus, he said.

However, while the domestic impact of Covid-19 has diminished, other economic challenges have increased. After decades of lack of significant price increases, Japanese businesses and households must reckon with inflation caused by the collapse of global supply chains and rising costs of food and energy due to the war in Ukraine. not. Inflation in September was about 3% year-on-year, lower than in many other countries, but it came as a shock to Japan, which has long been accustomed to stable prices.

Adding to the pressure, the yen, like other Asian currencies, has fallen dramatically against the dollar over the past year, forcing Japanese authorities to intervene in the currency market to strengthen its value. It is

Economists say the decline could be attributed to the Bank of Japan’s decision to keep interest rates low. Interest rate differentials created by repeated U.S. rate hikes have caused a sell-off in the yen as investors pile onto the dollar in search of higher returns, experts say.

The cheap yen has brought some benefits to Japanese exporters who offer cheaper products for overseas customers, as well as other Japanese companies with big earnings and investments abroad.

However, the stress on the domestic market appears to have outweighed the positives as businesses and consumers have had to pay more for imported goods, whether raw materials or finished goods.

The depreciation of the yen has left Japan with a record trade deficit. Imports surged nearly 45% in the first half of the fiscal year from April to September as fuel prices soared. By contrast, exports increased by just under 20%.

Still, Stephan Anglic, senior economist at Moody’s Analytics, described the trade side of Tuesday’s results as “counterintuitively good news”, noting that “a rebound in imports in the third quarter is likely due to Japan’s Covid-19 This reflects the fact that the recovery was slow,” the report wrote. It is gaining momentum as businesses and households return to consumption. ”

Japan’s stock benchmark, the Nikkei 225 Index, was trading 0.2% higher in Tokyo as of 1pm.

Looking ahead, the picture is mixed. Despite a weaker yen, foreign demand has been buoyed in the face of a global economic slowdown, exacerbated by China’s continued “no coronavirus” policy and rate hikes by the central bank as it tries to catch up with the Federal Reserve. It can be weakened enough.

On the other hand, Japan’s adaptation to continued pandemic life, the reopening of tourism in October, and massive government stimulus measures to offset the impact of inflation have all contributed to a modest continued recovery in domestic consumption. and are well below pre-pandemic levels. Mr. Kobayashi of Mitsubishi UFJ said: Corporate investment is expected to continue to increase as Japan pushes ahead with efforts to digitize its economy.

Overall, Kobayashi said it meant “already assured of a return to positive growth” over the next three months, despite the unexpected setback in the quarter.

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