Japan’s Economy Shrinks, Weighed Down by a Weak Yen and Rising Inflation

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A weak yen and high inflation have eroded Japanese consumers’ buying power and sapped businesses’ strength, setting the country’s recovery back just as Japan was adjusting to life with the coronavirus.

The country’s economy, the third largest after the United States’ and China’s, shrank at an annualized rate of 1.2 percent during the three-month period from July to September, government data showed on Tuesday. Analysts had predicted an expansion, but surging import prices weighed on the results.

The result followed nine months of growth. Japan’s economy had jumped 4.6 percent during the second quarter — revised up from an initial reading of 2.2 percent — returning it to its prepandemic size.

Tuesday’s reading comes as Japan faces headwinds from a weakening global economy, inflation that is the highest in decades by some measures and a yen that has plumbed its lowest levels against the dollar since 1990. An Omicron-fueled surge in infections over the summer also dampened an acceleration in consumer spending that began earlier in the year.

While Covid-19’s domestic impact has shrunk, other economic challenges have grown. After decades without significant price increases, Japanese companies and households are having to reckon with inflation caused by the breakdown of global supply chains and rising food and energy costs caused by Russia’s war in Ukraine. The price rises, which were around 3 percent year over year in September, are low compared with those in many other countries, but they have come as a shock to Japan, which has long been accustomed to price stability.

Adding to the pressure, the yen has fallen dramatically against the dollar over the last year, compelling the Japanese authorities to intervene in currency markets in an effort to shore up its value.

Economists say the fall can be attributed to the Bank of Japan’s decision to keep interest rates ultralow as the U.S. Federal Reserve rapidly raised its own rates in an effort to curb rampant inflation at home. The differential, experts say, has driven a sell-off of the yen as investors pile into the dollar in search of higher returns.

The cheap yen has had some benefits for Japanese exporters, whose products are less expensive for customers abroad, as well as for other Japanese companies with large overseas earnings and investments.

But the pluses seem to have been outweighed by the stress put on domestic markets as businesses and consumers alike have had to pay more for imports, whether raw materials or finished goods.

The yen’s weakness has created record trade deficits for Japan. The value of imports surged nearly 45 percent in the first half of the fiscal year, between April and September, as the price of fuel skyrocketed. Exports, by contrast, rose just under 20 percent.

Even with help from a weak yen, demand from abroad is likely to weaken in the face of China’s continuing “zero Covid” policies and a global economic slowdown exacerbated by interest rate increases by central banks trying to keep up with the Fed.