Japan released third-quarter GDP figures Monday, revealing the fastest pace of contraction in the Japanese economy since the devastating earthquake that took a heavy toll in April 2011.
GDP contracted 0.9 percent in the third quarter, or 3.5 percent annualized. The biggest contributions to the drop were exports (-5 percent) and capital expenditure (-3.2 percent). Domestic consumption also fell 0.4 percent after a government subsidy for purchasing eco-cars expired, leading to a drop in auto sales.
The auto sector — which comprises the biggest share of Japanese exports — provides a good example of the troubles facing the Japanese economy.
Fiscal policy, including the expiration of the eco-car subsidy, is partly to blame for the weakness in the auto sector and the wider domestic economy.
However, given that exports led the contraction in GDP, the dollar-yen exchange rate has been invoked by analysts as a source of the problem.
The yen is too high, they say, which makes Japanese auto exports too expensive for prospective international consumers.
Toyota announced last week that it would outsource production of a line of cars to a Mazda plant in Mexico and followed it up with a similar announcement Monday about ramping up production in Indonesia.
Societe Generale currency strategist Kit Juckes found the Toyota news rather striking, and chalked it up in part to the strong yen:
Citi analyst Mark Fielding and his team made similar comments, writing in a note to clients, "Toyota is also likely to benefit by shifting production of subcompact cars, which are not profitable as exports from Japan at today's exchange rates, to Mexico."
The Bank of Japan has been trying to weaken the yen for a long time, and to little effect.
However, given the latest deterioration in economic data, Bank of America economist Masayuki Kichikawa expects the central bank to up its efforts:
Kichikawa says that will set up a "tug-of-war" in 2013 for the Japanese economy between the negative impacts of continued weak external demand for Japanese products and the positive effects of monetary stimulus.
BoJ Governor Masaaki Shirakawa affirmed the central bank's policy stance Monday, saying the BoJ would continue to confront markets with a lot more monetary easing. Per Reuters:
It's unclear whether the BoJ will win out and lift the stagnant Japanese economy, but they are slated to keep trying, nonetheless.