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Asia's fading momentum seen in Japan's latest contraction

Trade war and Fed tightening pressure economies in China, South Korea and elsewhere

Japan's economy has contracted in two of three quarters this year.   © Reuters

TOKYO -- The contraction of the Japanese economy in the July-September quarter is a symptom of slowing growth across Asia, as the region grapples with rising interest rates and the escalating trade war between the U.S. and China.

Japan's economy contracted 1.2% from the preceding quarter, data Wednesday showed. This was partly due to a series of natural disasters, but also lackluster consumer and business spending. Year-on-year, Japan's growth fell to 0.3%.

The decelerating trend is expected to continue over the coming year across Asia.

Growth in China slowed to 6.5% in the same quarter -- the weakest expansion since the global financial crisis. The pace in Taiwan fell to 2.3% from 3.3%, and South Korea slumped to 2.0% from 2.8%.

Data on Wednesday showed retail sales in China slowing more than forecast by economists and real estate investment dropping to a 10-month low, even as industrial output picked up slightly.

"Growth momentum is going to slow," said Izumi Devalier, chief Japan economist for Bank of America Merrill Lynch. Asian economies had been riding on aggressive fiscal spending in the U.S., a big inventory rebuild in the global semiconductor industry, and benign inflation, she said, adding that "a lot of tail winds that converged in 2017 are fading."

While there are many downside risks, a slowdown may not be too severe. The International Monetary Fund projects that growth in emerging and developing Asia will slow to 6.3% next year from 6.5% in 2018 -- in October, it revised down its projection by 0.2 percentage point to account for the trade spat between the U.S. and China.

Deceleration is also evident in other parts of Asia.

Year-on-year growth in the Philippines cooled to 6.1% in the third quarter from 6.6% in the January-March period. A slide in the currency has raised the prices of imported goods, hurting the purchasing power of low-income families.

In Indonesia, growth dipped to 5.2% from 5.3%. Central banks in both countries have been aggressively tightening policy in an attempt to counter capital outflow stemming from the U.S. Federal Reserve's rate hikes.

The Fed has raised rates three times this year, and analysts expect another hike in December. Higher U.S. interest rates tend to make assets in emerging economies less attractive, prompting international investors to pull capital out of those countries.

"Aggressive monetary tightening will pressure household consumption heading into 2019," said Katrina Ell, an economist at Moody's Analytics.

Policy makers across the region are taking pre-emptive action to shore up their economies.

South Korean President Moon Jae-in has fired his finance minister and other top economic policy makers. The new finance chief has been tasked with revving up the economy and improving the job situation for young people with the unemployment rate near an eight-year high of 4.2%. Many corporations in the country are shifting production to low-wage countries after a large minimum wage hike at the beginning of this year made them wary of hiring.

In China, the government has shifted its policy focus from a tightening stance to easing, in an attempt to lift sagging sentiment among businesses and consumers.

The People's Bank of China cut the reserve requirement ratio (the amount of funds that banks have to hold at the central bank as a proportion of their total deposits) for the fourth time this year in October. The move follows the announcement of fiscal measures, such as cuts in individual income taxes and moves to force local governments to boost infrastructure spending.

Sagging sentiment is beginning to affect private consumption in China. In October, auto sales fell 12% from a year before, marking the fourth straight month of decline. Weaker sentiment is also reflected in stock prices, with the benchmark Shanghai Composite Index down 20% this year, and confidence among manufacturers falling to the lowest level in more than two years.

But policy alone will not be able to completely offset the slowdown.

China is still dealing with a debt overhang caused by a spending spree, which was aimed at countering the fallout of the global financial crisis but resulted in manufacturing overcapacity and a property market bubble.

"It is more like slowing the pace of (deleveraging) than loosening the credit spigot," said Merrill Lynch's Devalier. "What we are talking about is not a massive easing."

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