Where's the positive news? Japan's third-quarter contraction, inflation dim post-pandemic optimism

The Japanese economy's unexpected contraction in the third quarter - the first time in a year - has made unpleasant reading for Prime Minister Fumio Kishida's government even as analysts suggest the performance is a "natural part of the cycle".

The world's third-largest economy shrank 1.2 per cent on the year in the July to September quarter, data showed on Tuesday.

While economists have suggested the result might be a blip, political analysts are less upbeat, warning that the country is paying the price for a succession of administrations that have neglected structural reforms to the economy.

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Data released by the Cabinet Office showed seasonally adjusted real gross domestic product in the world's third-largest economy contracted 0.3 per cent in the July-September quarter.

That figure translates to a 1.2 per cent contraction on an annualised basis - the first decline in four quarters - and was significantly weaker than the 1.2 per cent increase reported in April-June.

The government attributed the contraction to a sharp 5.2 per cent increase in imports, with exports only rising 1.9 per cent and failing to counteract the negative growth. More costly energy imports, primarily of oil and coal, were the largest contributing factor.

Domestic consumption rose 0.3 per cent, also insufficient to counteract the downside factors, and remained short of the 1.2 per cent increase reported in the previous quarter. Restaurants and bars saw stronger performance than the summer months, but there are concerns the latest resurgence of the coronavirus will affect the next quarter's figures.

Health authorities reported 105,188 new cases on Tuesday, with Tokyo and Hokkaido the worst-affected regions. That figure is higher than the peak recorded in the sixth wave of the virus in the spring, and authorities are warning that the coming eighth wave will almost certainly surpass the previous daily highs of late August.

"These figures come after the economy performed more strongly than expected in the previous quarter so yes, there has been some slowing from this time last year, but a lot of this is due to the impact of imports that have become more expensive, particularly energy imports, and the weak yen," said Martin Schulz, chief policy economist for Fujitsu's Global Market Intelligence Unit.

The weakness of the yen is making imports more expensive, which is putting a damper on domestic consumption, he said, although the longer-term outlook for the economy is more rosy.

"This is a natural part of the cycle in a bad global economic environment, with international prices exploding, wages in Japan not growing and products and services becoming more expensive."

International interest rates have also risen, he pointed out, which have put people off mortgages and moving homes.

Yet Schulz remains relatively upbeat and believes the most recent figures are a blip that are very likely to be rectified in the following reporting period, adding, "Overall, the Japanese economy is doing well in comparison with many others."

But others fear that decades of neglect indicate the nation's economic problems may finally be coming home to roost.

"We will have to see what the next set of figures show, but even if they are relatively good, I still think they will only be covering up the fundamental problems that plague the economy," said Hiromi Murakami, a professor of political science at the Tokyo campus of Temple University.

"Energy costs are rising, food costs are rising, people are not spending because wages are not rising," she told This Week in Asia. "If Japan cannot increase domestic demand at the same time as improving exports, it's difficult to see where the positive news will come from.

"Japanese politicians have been delaying decisive action on the nation's economic problems for years, for decades, and this is the result," she said. "Fundamentally, the record depreciation in the yen and falling competitiveness mean that the Japanese economy no longer has the ability to recover by itself.

"And that is because the reforms that governments talked about were never implemented," she said.

Previous governments relied on the issuance of new bonds, backed by the Bank of Japan, but the catastrophic experience of the British government just a few weeks ago showed that tactic "is no longer realistic" as the markets would react immediately and decisively, she said.

"Prime Minister Kishida has to face these challenges, but that is going to be extremely difficult as he also needs to have the support of the government, industry and business leaders, as well as the understanding of the public," Murakami added.

"Japan has already delayed reforms too late; we will see if Kishida can change anything at this stage."

This article originally appeared on the South China Morning Post (SCMP).

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