Japan's economy nearly stalls in Q3 as trade war bites

Leika Kihara and Tetsushi Kajimoto, Reuters

Posted at Nov 14 2019 10:39 AM

High-rise buildings are seen at the Shinjuku business district during sunset in Tokyo, Japan. Toru Hanai, Reuters/file

TOKYO -- Japan's economy grew at the slowest pace in a year in the third quarter as the US-China trade war and soft global demand knocked exports, keeping policymakers under pressure to ramp up fiscal and monetary stimulus to bolster a fragile recovery.

Growth in private consumption also cooled from the previous quarter, casting doubt on the Bank of Japan's view that robust domestic demand will offset the impact from intensifying global risks.

The world's third-largest economy grew an annualized 0.2 percent in the third quarter, slowing sharply from a revised 1.8 percent expansion in April-June, preliminary gross domestic product (GDP) data released by the government showed on Thursday.

It fell well short of a median market forecast for a 0.8 percent gain and marked the weakest growth since a 2 percent contraction in July-September last year.

"Domestic demand had made up for some of the weakness in external demand, but we can't count on this to continue," said Taro Saito, executive research fellow at NLI Research Institute.

"A contraction in October-December GDP is a done deal. The economy may rebound early next year, but will lack momentum."

The feeble data may heighten calls from lawmakers for the government to boost fiscal spending to support the economy, which many fear will take a hit from a sales tax hike that took effect in October.

Private consumption grew 0.4 percent in July-September, slowing from a 0.6 percent increase in the previous quarter, despite stronger demand from households which sought to beat the October tax hike.

Capital spending, a rare bright spot in the economy, rose 0.9 percent in the third quarter, accelerating from the previous 3 months. That helped domestic demand add 0.2 percentage point to growth.

But external demand knocked 0.2 percentage point off GDP growth, as exports were hit by the protracted China-U.S. trade war that has upended world supply chains and hurt the global economy.

TRADE WAR STRAINS

Markets have been on edge in the past month as the United States and China seek to complete an initial trade deal to de-escalate their bitter tariff row.

US President Donald Trump on Tuesday dangled the prospect of completing the initial deal with China "soon," but has so far offered no new details on the negotiations.

The dispute has already hit big exporters hard. Japanese electronic giant Panasonic Corp last month reported a 12-percent drop in its second-quarter operating profit due to slumping sales of electric components to factory owners.

Economy Minister Yasutoshi Nishimura said while Japan's economy was likely to continue recovering moderately, the government would be vigilant to the impact from global risks and the sales tax hike.

"The fundamentals underpinning consumption remains firm. But consumer sentiment is weak, so we need to keep an eye out on developments," he told reporters after the GDP's release.

The data comes as the government plans to compile a package of measures for disaster relief and to protect the economy from heightening global risks.

The BOJ kept monetary policy steady last month but signaled its readiness to maintain or even cut already low interest rates to underpin a fragile recovery.

Prime Minister Shinzo Abe's administration proceeded with a twice-delayed sales tax hike to 10 percent from 8 percent in October as part of efforts to fix Japan's tattered finances.

Government officials say the hit to growth from the tax hike will be smaller than the previous increase to 8 percent from 5 percent in 2014, because of measures the administration has already taken to ease the impact on households.