Cost of Living: Japanese Economy Unexpectedly Shrinks After Weaker Yen

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Japan’s economy unexpectedly contracted for the first time in a year as rising costs of living weighed on consumer spending growth.

Gross Domestic Product (GDP) fell by 1.2% on an annualized basis in the three months to the end of September.

Fears of a slowdown in the global economy and the rise in import prices due to the weaker yen have restrained people’s spending.

However, economists expect a recession to be avoided as the world’s third largest economy recovers this year.

By the end of 2022, “we expect a recession towards an expansion,” Darren Tay, a Japanese economist at Capital Economics, said in a note to investors.

The Japanese economy “will benefit from a recovery in inbound tourism and an improved trade balance, but virus risks and rising inflation will limit the extent of the recovery,” he said. The country has suffered from rising inflation this year as the currency has depreciated against the US dollar.

Last month, the yen hit its 32-year low against the dollar, pushing up the cost of imports from oil to food for Japanese households and businesses.

The depreciation of the yen in recent months is due to the interest rate differential between Japan and the United States.

Since March, the US Federal Reserve has aggressively raised interest rates to counter the rising cost of living.

Meanwhile, the Bank of Japan keeps interest rates below zero.

Higher interest rates tend to make a currency more attractive to investors.

As a result, there is less demand for the currencies of countries with low interest rates, and these currencies lose their value. But EY’s Nobuko Kobayashi stressed that the currency crash was good news for Japanese companies selling goods overseas. Companies that produce overseas markets and provide services locally will increase their yen-converted profits due to the weaker yen. Therefore, the automotive and electronics sectors will benefit from the weaker yen,” she said.

Samuel Alexander

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