Cost of living: After the yen’s decline, Japan’s GDP unexpectedly shrinks

 

 

For the first time in a year, Japan’s economy unexpectedly contracted as consumer spending growth was negatively impacted by growing living expenses.

The three months leading up to the end of September saw a 1.2% annualised decline in the gross domestic product (GDP).

Due to concerns about a worldwide downturn and the higher cost of imports caused by the weak yen, people reduced their expenditure.

The third-largest economy in the world is predicted by economists to recover this year without going into recession.

By the end of 2022, according to Capital Economics’ Japan economist Darren Tay, “we are expecting a switch back into expansion.”

The Japanese economy “will benefit from a rebound in inbound tourism and a stronger trade balance. But virus risks and rising inflation will limit the extent of the recovery,” he added.

Along with global economy slowing and inflation rising around the world, Japan has struggled as its currency fell in value against the US dollar this year.

Last month the yen hit fresh 32-year lows against the dollar, which has made the cost of imported goods – from oil to food – more expensive for Japan’s households and businesses.

The yen’s slide in recent months has been driven by the difference between interest rates in Japan and the US.

Since March, the US Federal Reserve has aggressively raised its main interest rate as it tries to tackle the rising cost of living.

Meanwhile, the Bank of Japan has kept its key rate below zero.

Higher interest rates tend to make a currency more attractive to investors.

As a result there is less demand for currencies from countries with lower rates and those currencies fall in value.

However, EY’s Nobuko Kobayashi highlighted that the currency’s slide is good news for Japanese companies that sell their goods abroad.

 

“For the exporters, a weaker yen is definitely positive as it pushes down the cost. For those who produce and locally serve overseas markets, the profit converted into yen is inflated because of cheaper yen. Thus, automotive and electronics sectors benefit from weaker yen,” she said.

 

Ms Kobayashi added that the weak yen may also be good for Japan’s economy as it could help to attract investment from overseas.