A technical recession underway in China

The 3Q GDP (preliminary) is due for release next Monday. It is estimated that growth has contracted 0.8% (QoQ saar), better than the -1.2% recorded in 2Q, but worse than the consensus forecast of -0.3%. This will confirm the Japanese economy has slipped into a technical recession - two consecutive quarters of negative growth on the sequential basis. 

Falling demand from emerging markets, as a result of China's slowdown and sentiment deterioration caused by Fed tightening concerns, has weighed on Japan's manufacturing industry. Net exports and investment should be the twin drags to 3Q GDP. 

Thankfully, some of the leading indicators suggest that manufacturing activities will bounce back in 4Q (e.g., production forecast index, PMI). Exports of electronic machinery have showed tentative signs of a pickup, helped by seasonal demand and new product release. 

Moreover, the repercussion impact of external slowdown on the domestic economy has been muted. Employment / wage growth and household inflation expectations have remained broadly stable, while consumer spending has continued to recover gradually. Consumption should have acted as a key driver (and probably the sole driver) for GDP growth in 3Q. 

The Bank of Japan focuses more on the underlying growth / price trends than the short-term data volatility. Notwithstanding temporary weakness in GDP figures, the BOJ would likely downplay the recession concerns and keep policy unchanged at the meeting next week.