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Japan’s Economy Decelerates Sharply Amid Trade Tensions

Yoshiaki Nohara
Japan’s Economy Decelerates Sharply Amid Trade Tensions

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Japan’s economy slowed sharply in the third quarter as overall exports continued to fall amid trade tensions and a shopping splurge before a sales tax increase ran down stockpiles of goods.

The deceleration comes as Prime Minister Shinzo Abe mulls the size of an economic stimulus package aimed at shielding Japan’s economy from the global slowdown and the impact of the tax hike. Abe may also need to consider the implications of Tokyo’s trade spat with Seoul, as a steep decline in Korean tourist numbers dragged on the economy.

Gross domestic product grew at an annualized pace of 0.2% in the three months through September from the previous quarter, the Cabinet Office said Thursday, stuttering from revised growth of 1.8% in the April-June period. Economists had forecast a 0.9% expansion.

Stronger business investment combined with robust consumer spending before last month’s tax hike helped prop up growth, though rush demand was weaker than expected. The softer jump in consumer spending before the tax increase suggests an expected contraction in the economy in the current quarter will be smaller than feared.

“Given today’s data, I think fiscal spending of 3 trillion yen ($28 billion) would be sufficient for an economic package to keep the economy going,” said Takashi Shiono, economist at Credit Suisse Group AG. If the package turns out to be 4 trillion yen or more, that would likely prompt economists to revise up their forecasts for the economy, he added.

Abe ordered the stimulus measures last week as Japan’s economy shows sign of losing momentum, hit by soft global demand amid the U.S.-China trade war, the tensions with Korea and natural disasters such as Typhoon Hagibis. Those factors put growth in a vulnerable spot, given concerns over a cooling of consumer spending after the tax hike.

Japan’s Abe Calls for Extra Spending for Disaster Relief, Growth

While an influential member of Abe’s ruling party has said government spending of more than 6 trillion yen ($55 billion) is needed, the size and timing of the measures have yet to be announced.

Fiscal measures will likely reduce the need for the Bank of Japan to add stimulus, barring a major deterioration of economic data or a slide in markets, though speculation rumbles on that the BOJ will lower its negative rate by January. The smaller jump in quarterly spending will also reassure the central bank, which has flagged the impact of the tax hike as a concern.

The gain in private consumption was less than a quarter the size of the bump that came before the last sales tax hike in 2014. That suggests Japan’s economy will suffer less damage from the tax hike than five years ago, when a boom in consumption was followed by a bust that triggered a 7.3% economic contraction in the following quarter.

Temporary Pain

Falling service exports was the dark spot on trade, outweighing a slight improvement in shipments of goods overseas. That reflected a sharp drop in spending by Korean tourists as they chose other destinations or stayed home amid the dispute with Japan, a point highlighted by economy minister Yasutoshi Nishimura. The spat between the two neighboring economies has its roots in a dispute over Japan’s colonial past.

Still, economists said they didn’t expect the dispute with Korea to further depress growth in coming quarters given that exports of key items for Korea’s tech sector haven’t fallen in the way feared. That likely leaves tourist sentiment as a passing factor for Japan’s economy.

“I think the slump in the number of Korean tourists is already bottoming out. This time, the figures showed the worst extent of the impact, but I don’t think things will get deteriorate from here,” said Atsushi Takeda, chief economist at Itochu Research Institute Inc.

What Bloomberg’s Economists Say

“The undershoot in 3Q GDP growth suggests the slump in 4Q due to the higher sales tax is likely to be less severe than expected. The slowdown was driven mainly by a drag from net exports as imports picked up on front-loaded demand.”

-- Yuki Masujima, senior economist

Click here to read the report

(Adds comments from economy minister, analyst.)

--With assistance from Tomoko Sato and Toru Fujioka.

To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Paul Jackson, Jason Clenfield

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