Japan's economy shrinks in the third quarter due to natural disasters and trade problems

TOKYO (Reuters) – The Japanese economy has contracted stronger than expected in the third quarter, hit by natural disasters and falling exports, a worrying sign that trade protectionism is starting to weigh heavily on foreign demand.

The contraction of the world's third-largest economy is showing growing signs of global weakness, with China and Europe slowing down. Germany is expected to announce later in the day that its economy had also retreated last quarter.

Japan's annualized contraction of 1.2% between July and September was higher than the median estimate of a 1.0% decline and followed a strong 3% expansion in the previous quarter.

The government maintained that the economy was recovering moderately, due to the contraction of typhoons and the earthquake that halted the factories and stifled consumption.

But some analysts have said that such one-time factors alone could not explain the slowdown, highlighting worrisome export declines due to slowing Chinese demand and the consequences of the escalating global trade frictions.

"The decline in exports can not be fully attributed to natural disasters," said Hiroaki Muto, an economist at Tokai Tokyo Research Center.

"The message is that the Chinese economy is weakening, which means that Japanese exports will be slow to recover and that growth will slow around the first half of next year."

Japan's Gross Domestic Product (GDP) declined 0.3% in July-September from the previous quarter, according to Cabinet Office data released on Wednesday, which corresponds to a median estimate and a revised increase of 0 , 8% in April-June.

External demand – or exports minus imports – was reduced by 0.1 percentage point of GDP, which corresponds to the median estimate. However, a breakdown of data shows that exports fell 1.8% qoq, the fastest decline in more than three years.

Many analysts expect the Japanese economy to recover during the quarter, but weak exports suggest that protectionism could weigh on growth and prompt policymakers to turn to fiscal stimulus.

"The Japanese economy is likely to slow down from January if the trade war between the US and China intensifies," said Masaki Kuwahara, Chief Economist at Nomura Securities.

"US tariffs on imports of Chinese goods will come into effect in January, which will reduce Chinese shipments, which will in turn hurt Japanese exports and capital expenditures," he said.

Private consumption, which accounts for about 60% of GDP, decreased by 0.1% between July and September, with consumers spending less on travel, accommodation and restaurant meals.

Capital expenditures declined 0.2%, the first decrease in two years, due to lower construction equipment spending. The median estimate indicated that capital expenditures should remain unchanged. Investments increased by 3.1% in April-June.

Economy Minister Toshimitsu Motegi said Japan's economy is likely to pick up moderately as household income rises and the labor market tightens. But he added that the government is taking note of growing risks abroad.

"IT exports to Asia have slowed since the spring, so we need to be aware of the impact of China's trade frictions and growth prospects on the Japanese economy," he said. the press after the publication of the data.

In September, a major earthquake caused a power outage on Hokkaido Island, in the north of the country, as a result of severe typhoons that damaged airports and transport infrastructure in the country. 39, western Japan.

The companies quickly resumed their normal activities. According to economists, the war between the United States and China, the two largest economies in the world, is the main concern. It threatens Japanese exports of auto parts, electronic products and heavy machinery.

GDP data do not provide a detailed breakdown of exports by destination. Data from the Ministry of Finance released last month, however, showed that exports to China, Japan's largest trading partner, fell in September for the first time in seven months.

Another survey showed that China's manufacturing sector barely grew last month after a slowdown in September and that export orders continued to fall, which worries Japan, as China is a major buyer of its equipment and manufacturing components.