THE JAPANESE ECONOMY CONTRACTED BY 1.2 PERCENT WITH HIGH INFLATION

November 17, 2022

Linh Truong

NEWS

Source: Japan Times, AP News

Japan's gross domestic product contracted at an annual rate of 1.2 percent in the third quarter. Sequentially, the Japanese economy unexpectedly shrank from July to September as the yen historically weakened.

On this Tuesday, the real gross domestic product was reported to shrink 0.3% on-quarter by the Cabinet Office's data, which can be understood as a 1.2% annual decline, which economists had previously forecasted.

ANALYSIS

Why did the yen fall?

Japan's GDP was affected by the Covid-19 pandemic which slowed down the growth of tourism and industrial production. This unexpected contraction clouded the prospect of a quick recovery from the pandemic.

The import costs soared since foreign producers wanted to take the advantage of scarce resources to gain more profits. However, Japan could not switch costs to export as the global economy was facing a downturn. Because of this fact, Japan was producing at a loss and paid all the debts by printing more money. This directed the economy to accelerate inflation. In September, the yen’s inflation exceeded 3% for the first time in three decades.

The contributing factor to the yen’s fall against other currencies, especially the U.S. dollar is the divergence in interest rates. While the Fed had tightened the key interest rate, the Bank of Japan hadn’t. The variance in interest rates augmented the currency’s value of the U.S. dollar with higher interest rates against Japan’s yen with zero or minus rates. Earlier, an U.S. dollar could be traded at around 115 yen but currently, it has risen to 140 yen.

What has Japan been through because of inflation?

The impact of the coronavirus pandemic was so intense that firms were affected. Since firms were producing at a great loss, they had to dwindle in size and quantity produced. The lack of products affected both the essential goods resources and the exportation. The decline in the number of goods made embattled markets. Moreover, the crisis led to shrinking wages for workers since firms could not handle the costs and their gains were not enough to run their businesses normally. Even worse, there are thousands of layoffs which caused mounting unemployment in the nation. Another terrifying effect that this economic slump brought was the shrinking purchasing power of consumers. Consumers with lower wages and financial issues had no choice but to cut down on their spending which directly affected the selling ability of producers. In short, just one economic issue would bring about a multitude of corollaries. Rising inflation, expressly, price hikes, also held back consumer spending since their wages were cut down and prices kept increasing.

Firms could not invest in business growth since their budgets were used for recovery. The nationwide economy might come to a halt and even worse a downturn since there is no development in the market to boost sales and product quality.

The divergence of currency, or particularly, the decrease in the value of the yen led to the loss in importation. Prices for the same amount of goods were boosted considerably so the spending of the country increased. Then, with the same budgets, Japan could purchase fewer goods or had to borrow money and print more cash to get their wanted number of products.

Japan had to face a downward spiral of production due to China’s strenuous Covid-19 restrictions. As China is the producer of most resources in the world, Japan has to depend on China to import the necessary resources to support production.

However, the yen’s depreciation gives some hope for the recovery of Japan’s economy since more foreign visitors will come since they gain benefits from the variance of currency.

What did the Japanese government do to solve the problem?

Japanese policymakers have high hopes that the border reopening will develop the country’s economic outlook as foreign tourists will be attracted by cheaper traveling costs. The reopening of Japan’s border will boost the inbound visit to the country and tourist attractions will have the opportunity to make greater revenue from tourism. Furthermore, the border reopening will help the nation become more profitable through the increasing number of international trades and foreign investments. Foreign entrepreneurs will have a much easier path to visit Japanese enterprises to discuss partnership.

To solve the issue of the yen's plunge, from the last days of September to October, Japan intervened in markets for the first time in 24 years to control the currency slide between the yen and the US dollar.

The Central Bank of Japan persisted in the idea that more financial support is inevitable to save the nationwide economy. Furthermore, the Bank of Japan urged that the inflationary spiral could be healed by bumping up wages so that prices would be escalated.

Last month, Prime Minister Fumino Kishida proposed a measure to alleviate the suffering that markets had to deal with. He offered a fiscal stimulus package including aid to bring down energy costs, cash handouts to support childcare, and domestic travel subsidies. The Cabinet passed this budget of ¥29.1 trillion ($199 billion).