Japan’s Economy Shrinks Unexpectedly, Hit by a Weak Yen and Rising Inflation (Published 2022) (2024)

Japan’s economy, the world’s third largest, unexpectedly shrank in the three-month period from July to September, as a weak yen and high inflation eroded Japanese consumers’ buying power and sapped businesses’ strength.

The economy contracted at an annualized rate of 1.2 percent during the third quarter, government data showed on Tuesday, ending nine months of growth and setting back the country’s recovery just as Japan was adjusting to life with looser coronavirus restrictions.

Analysts had predicted a modest expansion, after Japan’s economy had jumped 4.6 percent — revised up from an initial reading of 2.2 percent — in the previous three-month period, returning it to its prepandemic size.

But the results were weighed down by import prices that have surged as the yen has plumbed its lowest levels against the dollar since 1990, a result of Japan’s decision to keep interest rates ultralow even as the United States raises them to combat inflation.

Tuesday’s reading also showed the headwinds that Japan still faces from a global economy that is slowing even more than forecast because of Russia’s war in Ukraine, as well as from domestic inflation that is the highest in decades by some measures. An Omicron-fueled surge in infections over the summer also dampened an acceleration in Japan’s consumer spending that began earlier in the year.

Still, the negative results may be short-lived. Shinichiro Kobayashi, a principal economist at Mitsubishi UFJ Research & Consulting, said that the surprise reading was largely related to a rapid increase in prices for imported services, among them advertising, and that Japan’s economy was likely to return to growth in the next quarter.