Japan’s economy is set to enter into recession as export growth slows, according to Capital Economics.
“We think the Japanese economy will enter a recession sometime next year,” said Marcel Thieliant, senior Japan economist at Capital Economics, said CNBC’s “Squawk Box Asia” Tuesday.
The recession will “mostly be driven by a drop in exports and also by becoming more cautious, which is typically what you see when exports start to fall,” he said.
Japan most recently reported a larger-than-expected trade deficit of $15 billion for the month of October. Exports rose by 25.3%, slower than a year-on-year growth of 28.9% seen in September.
Meanwhile, imports jumped 53.5% year-on-year in October, higher than a year-on-year growth of 45% the previous month. The nation is slated to report its monthly trade data on Dec. 15.
Separately, Japan is due to release revised third quarter GDP on Thursday. Analysts polled by Reuters expect a 1.1% annualized contraction for the July to September period – after seeing a 1.2% contraction the previous quarter.
That would mean it’s already headed for what is commonly categorized as a technical recession, defined as two consecutive quarters of negative growth.
However, the National Bureau of Economic Research defines recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”
Thieliant said the Bank of Japan is likely to maintain its ultra-dovish monetary policy and won’t start raising benchmark interest rates, especially amid recessionary concerns.
“In that environment, it would be very brave to tighten monetary policy,” he said.
Central bank Governor Haruhiko Kuroda reportedly brushed off the possibility of reviewing the BOJ’s current stance of maintaining low interest rates.
“The bank has indicated that it wants to see sustainable inflation and the kind of cost-push inflation that we are seeing now is not sustainable,” Thieliant said.
Japan’s core inflation for November came in at 3.6%, the highest in 40 years and higher than the BOJ’s target of 2%.
Despite forecasts of a contraction in growth, Japan’s household spending has been consistently on the rise, and grew 1.2% in October compared to a year ago. It marked a fifth consecutive month of gains since falling 0.5% in May.
This is also expected to show some sluggishness, according to Thieliant, who said real wages in the nation will eventually impact the wider consumption activity.
“The recovery in spending will have to slow as these households get hit by real incomes,” said Thieliant, as the nation saw sharpest contraction in real wages in more than seven years.
