| 8 December 2021, Wednesday |

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

The Japanese economy contracted much faster than expected in the third quarter, as global supply disruptions hampered exports and business spending plans, and new COVID-19 cases soured consumer sentiment.

While many analysts expect the world’s third-largest economy to recover in the current quarter as virus restrictions ease, worsening global production bottlenecks pose increasing risks to Japan’s export-dependent economy.

“The contraction was much larger than expected due to supply-chain constraints, which severely impacted car output and capital spending,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

“We expect the economy to recover this quarter, but the pace will be slow because consumption did not get off to a good start even after COVID-19 curbs were eased late in September.”

The economy shrank by 3.0 percent year on year in July-September, following a revised 1.5 percent gain in the first quarter, according to preliminary GDP data released on Monday, far worse than the 0.8 percent contraction predicted by the market.

The weak GDP reading contrasts with more encouraging readings from other advanced countries, such as the United States, where the economy expanded 2.0 percent in the third quarter due to strong pent-up demand.

Despite supply shortages and new COVID-19 curbs, factory output and retail sales in China unexpectedly increased in October, according to data released on Monday.

GDP fell 0.8 percent quarter on quarter, compared to market expectations of a 0.2 percent drop.

According to some analysts, Japan’s heavy reliance on the auto industry makes the economy more vulnerable to trade disruptions than other countries.

According to Shinichiro Kobayashi, principal economist at Mitsubishi UFJ Research and Consulting, automakers account for a large portion of Japan’s manufacturing sector, affecting a wide range of subcontractors.


On Friday, Prime Minister Fumio Kishida plans to unveil a large-scale economic stimulus package worth “several tens of trillion yen,” but some economists are skeptical of its immediate impact on growth.

“The package will most 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 immediate impact,” Norinchukin’s Minami predicted.

Consumption fell 1.1 percent from the previous quarter in July-September, following a 0.9 percent increase in April-June.

Capital expenditure fell 3.8 percent after increasing a revised 2.2 percent in the previous quarter.

Domestic demand reduced GDP growth by 0.9 percentage point.

Exports fell 2.1 percent from the previous quarter in July-September, as trade was hampered by chip shortages and supply-chain constraints.

According to Reuters polled analysts, Japan’s economy will expand by 5.1 percent on an annualized basis in the current quarter, as consumer spending and auto output pick up.

However, higher commodity costs and supply bottlenecks continue to pose risks to Japanese firms, threatening to undermine the economy’s outlook in the short to medium term.

According to Takahide Kiuchi, a former Bank of Japan board member who now serves as chief economist at Nomura Research Institute, real GDP will not return to pre-pandemic levels until the second half of 2023.

“China’s slowdown, supply constraints, rising energy prices, and a slowdown in inflation-hit Western countries will reduce the pace of growth until mid-2022,” Kiuchi predicted.

“As exports remain weak, Japan’s economy will likely experience moderate growth of around 1% 2% annualised from the second quarter onwards, even after the effects of stimulus are taken into account.”