Japan's economy shrank from July to September, ending two quarters of growth fueled by exports and tepid consumption. This made the central bank's efforts to gradually reduce its large monetary stimulus program more challenging in the face of increasing inflation.

Japan's Economic Woes Deepen

According to the statistics, persistently rising inflation is having a negative impact on family spending and making manufacturing more difficult due to a slowdown in global demand, particularly in China.

(Photo : by KAZUHIRO NOGI/AFP via Getty Images)
Japan's economy shrank from July to September, ending two quarters of growth fueled by exports and tepid consumption.

The GDP of the third-largest economy in the world shrank 2.1 percent in the third quarter, according to official statistics released on Wednesday. This was a far worse loss than the consensus market estimate of an annualized 0.6 percent dip. It came after a 4.5 percent expansion in the preceding quarter.

The dismal number belies policymakers' expectations of a post-pandemic rebound in domestic activity to counteract reduced foreign demand from China and others. It indicates a lackluster consumption and capital spending.

Following a 0.9 percent decline in the previous quarter, consumption was unchanged from July to September, missing the median growth projection of 0.2% of experts.

After falling 1.0 percent in April-June, capital expenditure declined 0.6% in the third quarter, confusing market expectations for a 0.3percent rise and undermining the BOJ's belief that strong business investment will support growth.

According to projections, external demand reduced GDP by 0.1 percentage points from July to September, with increases in service imports offsetting increases in vehicle exports.

Read also: Disney's $40 Billion Impact in Florida Faces Uncertainty Amidst Legal Battle

Export Gains and Weakening Yen Fail to Translate into Improved Real Earnings

Strong April-June growth was partly due to Japan's economy, which had been recovering from the epidemic slowly as it reopened borders and lifted restrictions on activities.

Although large exporters have benefited greatly from the weakening yen, salaries have not increased rapidly enough to offset the inflation that has been steadily rising for families.

For the eighteenth consecutive month, real earnings adjusted for inflation, a measure of consumer spending power, decreased 2.4% in September compared to the same month last year.

Although many are skeptical that the measures would have much of an impact on reviving the economy, Prime Minister Fumio Kishida has increased demands for businesses to increase salaries and unveiled a package of measures to lessen the financial damage caused by growing living expenses.

However, skepticism looms regarding the effectiveness of such measures in reigniting the economy.

In an effort to alleviate the financial burden caused by soaring living expenses, Kishida has unveiled a package of measures, but the effectiveness of these initiatives remains uncertain in the face of Japan's persistent economic struggles. As the nation navigates these turbulent economic waters, attention is keenly focused on the government's strategies to revive growth and restore financial stability for its citizens.

Related article: IRS Unveils Adjusted 2024 Tax Brackets: A Comprehensive Overview of Income Threshold Modifications