Technical recession confirmed in Japan; little impact on monetary policy

The 3Q GDP reported a 0.8% (QoQ saar) contraction this morning. This is the second consecutive quarter of decline, confirming that the economy has slipped into a technical recession. Investment and inventories were the main drags, reflecting the negative impact on business spending from faltering external demand. Private non-residential investment, in particular, shrank sharply by 5.0% in 3Q. Gross fixed capital formation contracted 2.5% accordingly. While exports registered a 10.9% rise in 3Q, it was largely a payback from the 16.1% decline in the preceding quarter. By contrast, domestic final demand remained generally stable. Private consumption bounced back to 2.1% after a temporary decline in the prior quarter. Government consumption and private residential investment both maintained positive and steady growth in 3Q. 

GDP growth has stayed slightly negative for two straight quarters (2Q: -0.7%). Another quarter of negative reading could be avoided for 4Q. Note that electronics exports have started to pick up, helped by seasonal demand and new product release. PMI also points to a rebound in manufacturing activities in 4Q. To be sure, the strength and the duration of recovery remain a question. Given that the US rate hikes have become imminent and the Chinese economy has not yet showed convincing signs of stabilization, the outlook for emerging market demand remains lackluster. This will continue to weigh on Japan's exports and investment activities. 

Today's 3Q GDP results undershot the consensus forecast by a wide margin (-0.2%). But this may not alter market expectations for the Bank of Japan to stay on hold at Thursday's meeting. A sluggish 3Q has been taken into account by policymakers during the economic outlook review conducted at the latest meeting on 30th Oct. The improvement of the consumption component in today's GDP report, together with the positive job and wage data, would allow the BOJ to argue that domestic recovery remains on track and policy easing has generated the favorable effects.