According to Capital Economics, Japan’s economy will enter recession as export growth slows.
“We believe the Japanese economy will enter recession sometime in the next year,” Marcel Thieliant, senior Japan economist at Capital Economics, told CNBC’s Squawk Box Asia on Tuesday.
The recession will become more cautious “mainly through a drop in exports and also through what you usually see when exports start falling,” he said.
Japan last reported a larger-than-expected trade deficit of $15 billion for the month of October. Exports rose 25.3%, slower than September’s 28.9% year-on-year growth.
Meanwhile, October imports rose 53.5% yoy, up from a 45% annual growth in the previous month. The nation is scheduled to release its monthly trade data on December 15th.
Independently of this, Japan will publish the revised GDP for the third quarter on Thursday. Analysts polled by Reuters expect an annualized decline of 1.1% for the July-September period – after a 1.2% decline in the previous quarter.
That would mean it’s already heading into what’s commonly referred to as a technical recession, defined as two consecutive quarters of negative growth.
However, the National Bureau of Economic Research defines a recession as “a significant decline in economic activity that is widespread across the economy and lasts longer than a few months.”
Tokyo Tower, left, and commercial and residential buildings at night in the Minato district of Tokyo, Japan on Saturday, October 1, 2022. Photographer by Akio Kon/Bloomberg via Getty Images
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Thieliant said the Bank of Japan is likely to maintain ultra-loose monetary policy and not start raising interest rates, especially amid recession concerns.
“In this environment, it would be very bold to tighten monetary policy,” he said.
Central Bank Governor Haruhiko Kuroda reportedly dismissed an opportunity to review the BOJ’s current stance on keeping interest rates low.
“The bank has indicated that it wants to see inflation sustained, and the kind of costly inflation we’re seeing now is unsustainable,” Thieliant said.
Japan’s core inflation came in at 3.6% in November, the highest in 40 years and above the BOJ’s 2% target.
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Despite forecasts of slower growth, Japanese household spending has risen steadily, rising 1.2% yoy in October. It marked its fifth straight month of gains since falling 0.5% in May.
This is also likely to show some inertia, according to Thieliant, who said real wages in the country will ultimately affect overall consumption activity.
“The recovery in spending will have to slow as real incomes hit these households,” Thieliant said, as the nation saw the sharpest fall in real wages in more than seven years.
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