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Japan’s economy shrinks more than expected in Q3 as supply shortages hit

November 15, 2021

TOKYO (REUTERS) – Japan’s economy contracted much faster than expected in the third quarter as global supply disruptions and fresh Covid-19 cases hit business and consumer spending, raising challenges for the new government’s growth plans.

While many analysts expect the world’s third-largest economy to rebound in the current quarter, worsening global production bottlenecks pose increasing risks to the outlook.

“The contraction was far bigger than expected due to supply chain constraints, which hit output and capital spending hard,” said Norinchukin Research Institute chief economist Takeshi Minami.

“We expect the economy to stage a rebound this quarter but the pace of recovery will be slow as consumption did not get off to a good start even after Covid-19 curbs were eased late in September.”

The economy shrank an annualised 3 per cent in July to September after a revised 1.5 per cent gain in the first quarter, preliminary gross domestic product (GDP) data showed on Monday (Nov 15), compared with a median market forecast for a 0.8 per cent contraction.

The weak GDP contrasts with more promising readings from other advanced nations such as the United States, which saw its economy expand 2 per cent in the third quarter on the back of strong pent-up demand.

On a quarter-on-quarter basis, GDP fell 0.8 per cent compared with market forecasts for a 0.2 per cent decline.

Prime Minister Fumio Kishida plans to compile a large-scale economic stimulus package worth “several tens of trillion yen” on Friday, but some economists are sceptical about its impact on near-term growth.

“The package will likely be a mixed bag of near-term and long-term growth measures, and the focus may be blurred, so it won’t have much impact near-term,” Mr Minami said.

Consumption fell 1.1 per cent in July to September from the previous quarter after a 0.9 per cent gain in April to June.

Capital expenditure decreased 3.8 per cent after rising a revised 2.2 per cent in the previous quarter.

Domestic demand shaved off 0.9 percentage point to GDP growth.

Exports lost 2.1 per cent in July to September from the previous quarter as trade was hit by chip shortages and supply chain constraints.

Analysts polled by Reuters expect Japan’s economy to expand an annualised 5.1 per cent in the current quarter, as consumer activity and auto output pick up thanks to a drop in Covid-19 cases and easing supply disruptions.

Japanese firms still face risks from higher commodity costs and supply bottlenecks, which threaten to undermine the economic outlook over the short term to midterm.

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