Japan's economy is experiencing notable shifts as new data reveals the country's growth has slowed considerably during the third quarter of 2024. According to recent statistics released by Japan's Cabinet Office, the economy expanded at an annualized rate of only 0.9%. This marks a significant decrease from the revised rate of 2.2% registered during the previous quarter, as factors such as weak capital spending weighed heavily on overall economic performance.
Despite the tepid growth, there are some positive signals, particularly with consumer spending. The latest reports indicate private consumption—which constitutes more than half of Japan's economic output—increased by 0.9%. This figure outstripped both market expectations and the 0.7% growth recorded for the prior quarter. Economic analysts have pointed out this unexpected uptick may be indicative of rising household confidence.
Economist Kengo Tanahashi from Nomura Securities noted, "The large increase in consumption was a big surprise." He also suggested, though, it could reflect one-off factors such as the rebound from auto production disruptions caused by previous safety certification scandals, combined with temporary income tax cuts boosting consumer wallets.
Yet, the broader picture isn’t entirely rosy. The overall slowdown is underscored by the troubling state of capital spending, which fell by 0.2% during the same period. This decline signals concerns about the strength of private demand, particularly considering the downward pressure being exerted by the slowdown of economies like China and the United States, which has negatively influenced Japan's export activities.
The dip in net external demand had also contributed to the sluggish growth, forcing the economy to rethink its reliance on exports. Export levels saw diminished returns, with the net external demand subtracting 0.4 percentage points from GDP growth—worse than the previous quarter’s contribution of just 0.1 percentage points negative. The dwindling performance of exports, particularly in sectors like machinery and chipmaking, has raised alarm bells among economists.
Against this backdrop, Japan's central bank, the Bank of Japan, has held interest rates at ultra-low levels but appears ready to adjust its monetary policy if needed. The improved consumption data could provide the justification for potential rate hikes moving forward, aimed at fostering sustained economic recovery. Economy Minister Ryosei Akazawa stated, "We expect the economy to continue to recover on the back of improved employment and wage conditions."
Looking forward, the government's strategies include efforts to stimulate growth through possibly new fiscal policies and targeted spending initiatives, especially aimed at bolstering the struggling semiconductor and artificial intelligence sectors. Prime Minister Shigeru Ishiba has laid out ambitious plans to invest over 10 trillion yen (approximately $64 billion) by 2030 to support these areas.
There are, nevertheless, caveats to this optimism. Natural disasters, such as Typhoon Shanshan—one of the fiercest to strike Japan recent memory—impacted manufacturing and economic activity during the quarter. Extensive disruptions, including train and flight cancellations, compounded the challenges presented by the summer season’s extreme weather.
For consumers, the typhoon resulted not only in halted production but also led to panic through hoarding of emergency supplies, resulting in rice shortages across supermarkets—clear indicators of how environmental factors can drastically influence economic trends.
Looking to the future, Marcel Thieliant, Head of Asia-Pacific at Capital Economics, observed, "The economy lost momentum during this quarter, and we think GDP growth will likely hover around trend levels over the next few quarters."
While economic activity has picked up on the domestic front, the interplay with external economic conditions remains a key focus. The government, sensing its precarious position, is gearing up to navigate the unpredictability posed by international markets and their ripple effects on Japan's own economy.
With the upcoming measures outlined by Prime Minister Ishiba’s administration, which include proposals for cash handouts to support low-income families, there’s cautious anticipation as stakeholders await indicators of true economic resilience and the sustained impact of consumer confidence.
Japan must balance strengthening its domestic economy against challenges from global slowdowns, with the central bank—and now more than ever, the government—working to strike the right balance between stimulation and financial caution.
