The Japanese economy shrinks in the third quarter, the prospects for the trade war are recovering

TOKYO (Reuters) – The Japanese economy has suffered more than expected declines in the third quarter, affected by natural disasters and declining 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. Data released later in the day showed that the German economy also contracted in the third quarter due to weak external trade.

Despite this failure, the Japanese government remained convinced that the economy continued to recover moderately, due to the contraction of the typhoons and the earthquake that stopped the factories and slowed consumption.

But some analysts have said that such one-time factors alone could not explain the economic downturn, highlighting worrying declines in exports due to slowing Chinese demand and the fallout from the growing friction of global trade.

"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."

The 1.2% annualized contraction in July-September was higher than the median estimate of a 1.0% drop and followed a strong 3.0% growth in the previous quarter, government data released Wednesday.

This drop is mainly due to the 1.8% fall in exports, the largest decline in more than three years. Capital spending, which rose 3.1% in April-June, fell 0.2% to mark the first drop in two years, the data showed.

Analysts expect a rebound for the current quarter, but warn that it could be lukewarm and that growth could slow down next year, when trade conflict tensions will become sharper.

"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.

Policy makers in a link

The intensification of uncertainties abroad is a source of headaches for Japanese policymakers, already worried about the negative impact on consumption of the expected rise in sales tax next year.

Private consumption, which accounts for about 60% of GDP, fell by 0.1% in July-September, as consumers spent less on travel, accommodation and restaurant meals.

While the government is considering a stimulus package of about 10 trillion yen ($ 88 billion) to offset the impact of the tax hike, a waning of the outlook abroad could reinforce calls from politicians to even bigger expenses.

This puts decision makers in a stalemate. Many analysts believe that the Bank of Japan has little room for maneuver to launch a major stimulus package that weighs heavily on financial institutions.

Japan's soaring debt, the largest of the advanced economies, also limits the government's ability to deploy a large spending budget.

"Monetary policy being too tense, it would be difficult to take additional measures of easing. Tax measures are already under consideration to offset a blow related to the rise in the sales tax. That leaves little room on this front, "said Takeshi Minami, chief economist at the Norinchukin Research Institute.

"But you can not rule out the possibility of a larger spending package, depending on the magnitude of the economic downturn."

Japanese plants quickly recovered from natural disasters in the third quarter. The trade war between the United States and China is the main concern of Japanese companies as it threatens Japanese exports of auto parts, electronic products and heavy machinery.

Government data released last month showed that exports to China, Japan's largest trading partner, fell in September for the first time in seven months.

"IT exports to Asia have slowed since the spring, so we need to be aware of the impact of trade frictions and China's growth prospects on the Japanese economy," the minister told reporters. of Economy Toshimitsu Motegi after the release of GDP data.

($ 1 = 113.9000 yen)