Japan's economy dived 3% in third quarter

Japan's economy contracted much faster than expected in the third quarter as global supply disruptions hit exports and business spending while new COVID-19 cases soured the consumer mood, undermining efforts to stoke a virtuous growth cycle.

While many analysts expect the world's third-largest economy to rebound this quarter as virus curbs ease, worsening global production bottlenecks pose increasing risks to export-reliant Japan.

"The contraction was far bigger than expected due to supply-chain constraints, which hit car output and capital spending hard," said Takeshi Minami, chief economist at Norinchukin Research Institute.

"We expect the economy to stage a rebound this quarter but the pace of recovery will be slow as consumption did not get off to a good start even after COVID-19 curbs were eased late in September."

The economy shrank an annualized 3.0 percent in July-September after a revised 1.5 percent gain in the second quarter, preliminary gross domestic product data showed yesterday, much worse than a median market forecast of a 0.8% contraction.

The weak GDP contrasts with more promising readings from other advanced countries such as the United States, where the economy expanded 2.0% in the third quarter on strong pent-up demand.

In China, factory output and retail sales unexpectedly rose in October, data on Monday showed, despite supply shortages and new COVID-19 curbs.

On a quarter-on-quarter basis, Japan's GDP fell 0.8 percent compared with market forecasts for a 0.2 percent decline.

Some analysts said Japan's heavy dependence on the auto industry meant its economy was more vulnerable to trade disruptions than other countries.

Shinichiro Kobayashi, principal economist at Mitsubishi UFJ Research and Consulting, said automakers make up a large part of Japan's manufacturing sector with a wide range of subcontractors directly affected.

Prime Minister Fumio Kishida announced plans to compile a large-scale economic stimulus package worth "several tens of trillion yen" on Friday, but some economists were skeptical about its impact on growth near-term.

The package will feature a plan to urgently strengthen the chip industry while the government will also formulate a strategy for storage batteries, key to the green and digital growth areas, trade minister Koichi Hagiuda said.

However, some analysts were skeptical about the impact of the stimulus.

"The package will 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 impact near-term," Norinchukin's Minami said.

Consumption fell 1.1 percent in July-September from the previous quarter after a 0.9 percent gain in April-June.

Capital expenditure also decreased 3.8 percent after rising a revised 2.2 percent in the previous quarter.

Domestic demand shaved off 0.9 percent point to GDP growth.

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

Analysts expect Japan's economy to expand an annualized 5.1 percent in the current quarter, as consumer activity and auto output pick up.

But Japanese firms still face risks from commodity costs and supply bottlenecks, which threaten to undermine the economy over the short- to mid-term.