Japan’s economy shrank in the three months through September, weighed down by a historic slide in the yen that ultimately triggered an intervention in currency markets.

Gross domestic product contracted at an annualized pace of 1.2% in the third quarter, slipping into reverse for the first time since last year, the Cabinet Office reported Tuesday. Economists had expected an expansion of 1.2%.

The surprise contraction reflects the impact of Japan’s embattled currency and its still long path toward a solid recovery from the pandemic, with further risks clouding the outlook.

The plunge in the yen amplified the country’s already soaring import bill, weighing on net trade. Japan acted in late September to prop up the currency for the first time in 24 years. The government continued to step into markets in October to rein in sharp slides in the currency largely driven by the divergence between the Bank of Japan’s rock-bottom interest rates and sharply higher borrowing costs in the US.

Fearing another setback in Japan’s recovery as the weak yen drives up energy costs and inflation, Prime Minister Fumio Kishida last month put together an economic stimulus package that includes aid to reduce energy costs for households and businesses. His cabinet approved an extra budget of 29.1 trillion yen ($207 billion) to fund these measures.

“When the yen falls this fast, companies face a tough situation in that they are hit by higher import costs of materials while they can’t easily pass on cost to exports when overseas economies are slowing down,” said Harumi Taguchi, principal economist at S&P Global Market Intelligence.

Japan was also hit by another virus wave in the summer, with the number of daily new cases hitting 200,000 in August. The country’s worst surge in cases also helped cool consumer spending. While the government didn’t bring back Covid-related restrictions this time, the resurgence of infections led some people to refrain from going out.

Like many of its global peers, Japan is also suffering from accelerating inflation. In September, nationwide inflation surpassed 3% for the first time in over three decades, excluding the impact from tax hikes.

Real wages, however, have been declining for six months since April, eating into consumers’ purchasing power.

“The government’s stimulus package may give a floor to consumption, but I don’t think it will be strong enough to boost consumer spending,” Taguchi said. – BLOOMBERG