Japan Confirms Deeper GDP Decline, Backing Stimulus Package

Japan's economy shrank in the three months through September, the government confirmed in a revised report, giving further justification for Prime Minister Sanae Takaichi's stimulus package announced last month.

Gross domestic product fell at an annualized pace of 2.3% in the third quarter, as revised figures showed business spending and housing investment came in weaker than preliminary figures. The contraction was deeper than the initial reading of a 1.8% fall, and was the first in six quarters.

The lackluster results back up Takaichi's stimulus package, which featured the largest fresh spending since the pandemic. It adds an element of complexity to the Bank of Japan's upcoming policy decision latesr next week, but likely won't derail it from its gradual hiking path.

To ease the burden of inflation on households, Takaichi unveiled a stimulus package featuring ¥17.7 trillion ($114 billion) in planned fresh spending. Outlays from the package include price-relief steps such as utility subsidies and tax cuts, as well as wage-support measures aimed largely at helping smaller firms. Labor unions in the country are pushing for continued growth in pay negotiations after the strong pay hikes of recent years.

The government estimates that the package will lift the nation's GDP by an average of about 1.4 percentage points per year on an annualized basis for three years, assuming the measures take effect during that span. Making sure that voters feel the hit from inflation is easing is key for Takaichi, whose predecessors have been ousted from office partly due to simmering discontent over the cost of living.

Meanwhile, overnight-indexed swaps now indicate an around 90% chance of the central bank hiking this month, following Governor Kazuo Ueda's strong hints last week that an increase in borrowing costs is coming soon. Given that the quarterly economic decline is likely to be temporary and largely caused by one-off factors including housing regulation changes, Monday's data is unlikely to derail the BOJ from its policy path too much.

Separate labor ministry data on Monday showed real wages fell 0.7% from the previous year in October, the 10th straight month of decline. While nominal wages rose 2.6% and base salaries climbed at the same pace in a sign of sustained pay momentum, the pace is still slower than inflation. A more stable measure, which avoids sampling issues and excludes bonuses and overtime, climbed 2.2% for regular workers, slowing slightly from the previous month.

Japan's main price gauge has remained at or above the BOJ's 2% target for more than three and a half years, marking the longest streak since the early 1990s.

Source: Bloomberg Europe