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Economy falters in Q3, hampered by natural disasters

After rebounding in the second quarter, Japan’s economy contracted again in the third quarter, as it did in Q1. This was largely the consequence of several natural disasters—including torrential rain, a typhoon and an earthquake—that struck the country this summer. GDP contracted 1.2% in Q3 in seasonally-adjusted annualized terms (SAAR), contrasting Q2’s revised 3.0% increase (previously reported: +1.9% quarter-on-quarter SAAR) and undershooting market expectations of a 1.0% fall. In annual terms, GDP grew 0.3%, down from Q2’s revised 1.4% rise (previously reported: +1.0% year-on-year).

The third quarter’s feeble performance came on the back of a broad-based decline in nearly all GDP components. Despite a tight labor market and nascent wage growth, private consumption fell 0.5% SAAR (Q2: +2.6% qoq SAAR), while government consumption rose 0.7% (Q2: +0.8% qoq SAAR). Fixed investment contracted 1.9% in Q3 (Q2: +7.2% qoq SAAR) due largely to plummeting public investment spending, along with a fall in private non-residential investment. On the other hand, private residential investment rebounded in the quarter.

Lastly, the external sector markedly weakened in the quarter, partly due to extreme weather events disrupting the country’s supply chains and export terminals. Exports fell 7.1% in Q3 (Q2: +1.4% SAAR), while imports also declined (Q2: -5.6% SAAR, Q2: +4.2% SAAR). Despite the sharp export decline, the sector only subtracted 0.3 percentage points from growth in Q3, a slight improvement over Q2’s negative contribution of 0.4 percentage points.

Looking ahead, the economy should recover in Q4 and beyond, helped notably by robust investment in preparation for the 2020 Tokyo Olympics. Nevertheless, Japan’s export-oriented economy remains highly vulnerable to the increasing global trade frictions arising from the Sino-American dispute.

As noted by Nomura analysts:

“We think this turn to negative GDP growth is a temporary downturn caused by the natural disasters. In fact, monthly indicators released since October point to a recovery in real exports and real consumer spending […] On the other hand, we see increasing concerns over a possible downswing in corporate activity, particularly in real capex, which has followed a relatively steady expansion path thus far. […] We see a need for caution regarding the risk of a downswing in the overall economy in the event that concerns over stagnation in global trade, stemming from developments such as heightened trade friction between the US and China, cause corporations to become more cautious in their production and investments.”

The median GDP forecast among BoJ members is 0.8% for both FY 2019 and FY 2020. Met the why particular Consensus Forecast panelists see GDP expanding 1.1% in calendar year 2019, which is unchanged from last month’s projection. In 2020, the panel projects the economy to grow 0.6%.

Japan - Investment Data

2013  2014  2015  2016  2017  
Investment (annual variation in %)5.0  2.9  1.8  1.2  2.5  

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Japan Facts

ValueChangeDate
Bond Yield0.11-4.41 %Nov 15
Exchange Rate113.6-0.35 %Nov 15
Stock Market21,8040.11 %Nov 15

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