Japan’s first preliminary estimate of the 3Q23 GDP disappointed as the economy contracted more than expected, at -0.5% q/q (-2.1% q/q annualized rate) while 2Q’s annualized growth was revised lower to 4.5% (from previous estimate of 4.8%). This is Japan’s first sequential decline since the strong 1H23 rebound as nearly all of the major components of the economy (including private consumption, business spending and net exports) faltered in 3Q except for government consumption.

Japan GDP Outlook – Walking Into A Technical Recession Our growth outlook for Japan continued to be weighed by the downside factors of weak domestic demand, uncertain external demand landscape, financial market jitteriness on the back of tighter monetary policies stance among advanced economies while partly cushioned by upside factors of improving tourism and positive impact on in-person services. Japan’s manufacturing and external-oriented service sectors remained challenged and at the same time, the risks of a persistently weaker yen and costlier energy commodities could re-balloon Japan’s import bill, and that in turn will hurt net exports and subtract growth from GDP. The influx of foreign tourists and a cheaper yen have helped Japan’s services sector fare better and anchor the domestic recovery but downside risk to services depends on the extent of global and China growth slowdown and Japan’s services PMI has clearly seen its uptrend easing in the recent months. For now, we maintain our 2023 GDP growth forecast at 1.5%, compared to the 0.9% growth pace recorded in 2022. We expect growth to slow further to 1.0% in 2024.