BUSINESS: Japan
Economy Unexpectedly Negative Growth Due to Weak Yen

The Japan­ese econ­o­my unex­pect­ed­ly con­tract­ed for the first time in a year as ris­ing prices direct­ly hit growth in con­sumer spending.

Gross domes­tic prod­uct (GDP) fell by 1.2% on an annu­al­ized basis in the three months to the end of September.

Fears of a glob­al reces­sion and the depre­ci­a­tion of the yen made imports feel over­priced, caus­ing peo­ple to hold back on spending.

But econ­o­mists expect Japan, the world’s third-largest econ­o­my, to recov­er this year and avoid a recession.

By the end of 2022, “we expect the Japan­ese econ­o­my to turn to expan­sion again,” Dar­ren Tay, a Japan­ese econ­o­mist at Cap­i­tal Eco­nom­ics, said in an investor note.

The Japan­ese econ­o­my “will ben­e­fit from a recov­ery in inbound tourism and an improved trade bal­ance,” he said. How­ev­er, risks from the virus and ris­ing infla­tion will lim­it the extent of the recovery.”

With the glob­al econ­o­my slow­ing and glob­al infla­tion ris­ing, Japan has suf­fered a loss of cur­ren­cy val­ue against the dol­lar this year.

Last month, the yen hit a 32-year low against the dol­lar, push­ing up the cost of imports for Japan­ese house­holds and busi­ness­es, from oil to food.

The depre­ci­a­tion of the yen in recent months is due to the inter­est rate dif­fer­en­tial between Japan and the Unit­ed States.

The US Fed­er­al Reserve (Fed) has aggres­sive­ly raised key inter­est rates since March to com­bat ris­ing inflation.

Mean­while, the Bank of Japan keeps key inter­est rates below zero.

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

As a result, the demand for the cur­ren­cy of the coun­try with the low inter­est rate decreas­es, and the val­ue of the cur­ren­cy falls.

But EY’s Nobuko Kobayashi stress­es that the cur­ren­cy’s depre­ci­a­tion is good news for Japan­ese com­pa­nies sell­ing their prod­ucts overseas.

“For export­ing com­pa­nies, the weak­er yen leads to cost reduc­tions, so it is def­i­nite­ly a plus. The auto­mo­tive and elec­tron­ics sec­tors will ben­e­fit from a weak­er yen.”

Kobayashi added that a weak­er yen is good for the Japan­ese econ­o­my as it can attract for­eign investment.