Japan's economy shrinks as consumers hold back on spending

The Japanese economy contracted at an annual rate of 1.2 per cent in the July-September quarter, as consumption declined amid rising prices.

Seasonally adjusted real gross domestic product for the world's third-largest economy shrank 0.3 per cent on-quarter, according to government Cabinet Office data released on Tuesday.

The annual rate shows how the economy would have grown if the quarterly rate were to continue for a year.

Japan's GDP, or the sum of the value of a nation's products and services, was weaker than analysts had expected, coming after three quarters of moderate growth. Like many nations, Japan has suffered as the coronavirus pandemic has slammed industrial production and tourism.

Private consumption grew 0.3 per cent in July-September, slowing down from the 1.2 per cent per cent growth recorded in the previous quarter.

Private investment grew 1.5 per cent, down from 2.4 per cent growth in the previous quarter.

Another factor is the Japanese yen's fall against other currencies, especially the US dollar.

The Federal Reserve has been tightening the key interest rate, but the Bank of Japan has not.

The differential in interest rates tends to boost the value of the currency of the nation with higher interest rates, against the nation with zero or minus rates like Japan's, according to analysts.

The US dollar, trading at about 115 Japanese yen a year ago, now costs about 140 yen.

Although the weak yen has generally tended to work as a boon for Japanese exporters such as automaker Toyota Motor Corp. and video game developer Nintendo Co., it also makes imports more expensive.

The latest GDP data showed dropping exports.

A weak yen is devastating for imports, especially for Japan, which imports almost all its oil, as well as much of its food.

The war in Ukraine has also sent such prices higher.

Inflation in Japan at about 3 per cent is moderate compared to the US and some other nations. But it's still noticeable, with everything from cab fares to packaged snacks going up in prices.

In recent decades, Japan has suffered what's known as deflation, or a continuing downward spiralling of prices.

And so widespread price hikes come as a bit of a shock to consumers when wage growth has been relatively slow.

China's Covid-19 restrictions are also being closely watched because of their great impact on Japan and the Asian region.

Although there has been some easing of restrictions, fears are growing about a next wave of infections bringing back lockdowns and other restrictions.

Japanese production was sorely hit by the restrictions, seen in the shortage of supplies in computer chips and other parts.

Some analysts say the Japanese economy will likely gradually recover, although still at risk from China's pandemic measures, as well as larger geopolitical tensions like US-China relations.

But there were also signs of hope.

Tourists from abroad have returned, starting from last month after more than two years of tight border limits.

“The yen's depreciation gives tourists better value for money, making Japan more attractive as a destination,” said Hiroyuki Ueno, senior economist at SuMi Trust.