Japan Economy Shrinks, Hit by Supply-Chain Troubles

Japan Economy Shrinks, Hit by Supply-Chain Troubles

Recovery likely this quarter, but government also wants big stimulus package

Japan’s economy shrank in the July-September period owing to a fall in exports caused by supply-chain constraints and lower consumer spending during a Covid-19 state of emergency.

The decline will likely give a push to Prime Minister Fumio Kishida’s plans for cash handouts to families to stimulate the economy, although economists expect growth to resume in the current quarter regardless.

In the third quarter, the world’s third-largest economy contracted 0.8%, compared with a 0.4% expansion in the previous quarter. The economy shrank 3% on an annualized basis, which reflects what would happen if the third-quarter pace continued for a full year.

While some major economies, including the U.S. and China, have already surpassed their pre-pandemic size, Monday’s data showed Japan’s gross domestic product was still smaller than it was in the final quarter of 2019, just before Covid-19 spread around the world.

“The extremely weak results of the July-September GDP increase the chance that the government will expand the size of its economic package,” said Okasan Securities economist Takuji Aida.

Mr. Kishida said last week he intended to pass an extra budget by the end of the year that would include cash payments and vouchers worth nearly $900 per child for most families as well as an additional cash payment of that amount for poor households. He has said the overall package will amount to several hundred billion dollars.

Although media commentators said Mr. Kishida was throwing money at the problem of sluggish growth without a clear philosophy, Japan has more room than most countries for new spending because inflation remains around zero. In the U.S., where inflation topped 6% in October, the Biden administration’s plans for new spending have run into trouble.

Mr. Aida of Okasan Securities said the Japanese economy could recover to its pre-pandemic level by mid-2022 if the stimulus package is large enough.

In the July-September quarter, car makers had to cut back production owing to shortages of semiconductors and other parts, which were exacerbated by measures in Asian countries such as Malaysia to stem the spread of Covid-19.

Exports, which had been a driver for Japan’s economic recovery from the pandemic, fell 2.1% from the previous quarter. Private spending dropped 1.1%, reflecting a sharp decline in car sales and continued weakness in services.

Major Japanese cities were in a state of emergency for much of the quarter, limiting spending on restaurants and travel. The Summer Olympics in Tokyo, which took place from July 23 to Aug. 8, failed to boost spending because spectators were barred from most events.

The situation is improving. Toyota Motor Corp. said it planned to resume operation of all of its production lines in Japan in December for the first time in seven months.

On Monday, Bank of Japan Gov. Haruhiko Kuroda told business leaders in Nagoya, close to Toyota’s headquarters, that supply-chain bottlenecks are expected to be resolved within the next few months as the spread of Covid-19 infections has subsided since September in Southeast Asia.

The state of emergency was lifted at the beginning of the current quarter, allowing restaurants to stay open late and events to resume. New daily infections are down more than 99% from the peak, and three-quarters of the population is fully vaccinated.

Taro Saito, an economist at NLI Research Institute, said he expected Japan’s economy to expand an annualized 7.0% in the current quarter. But he said the economy could shrink again in early 2022 if infections come back during the winter and the government reimposes restrictions on daily activities.

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