Japan Drops to Fourth-Largest Economy Amid Recession

Japan Drops to Fourth-Largest Economy Amid Recession: Japan’s economy unexpectedly slid into recession as it shrank for a second consecutive quarter, primarily due to weak domestic demand. The Cabinet Office reported a contraction of 0.4% in the final quarter of last year, following a revised 3.3% decline in the previous quarter. This unexpected downturn led to Japan losing its spot as the world’s third-largest economy in dollar terms, slipping to the fourth position behind Germany.

Japan Drops to Fourth-Largest Economy Amid Recession

The report highlighted a decrease in spending by both households and businesses for the third consecutive quarter. The downturn challenges predictions about the Bank of Japan (BOJ) ending its negative interest rate policy soon. Analysts had anticipated a 1.1% growth, but the actual result was weaker than expected.

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The surprise contraction complicates the BOJ’s plan for a rate hike, which many economists predicted would happen by April. The market’s reaction showed a decrease in the likelihood of a BOJ rate hike by April, dropping from 73% to around 63% after the results.

Takeshi Minami, an economist at Norinchukin Research, noted that the unexpected contraction poses challenges for the BOJ, affecting its plans to end the negative rate policy. Despite recent discussions about a possible policy shift, the BOJ had aimed to reassure markets that a rate hike wouldn’t signal a drastic change.

The contraction in GDP for the fourth quarter signals a technical recession for Japan, raising doubts about the BOJ’s quick departure from its current policy stance. The data emphasized Japan’s reliance on external demand as domestic demand weakened amid persistent inflation.

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Factors contributing to the economic downturn include a 0.2% retreat in private consumption, with households tightening budgets due to rising living costs. Household spending also fell by 2.5% in December compared to the previous year. Business spending was sluggish, decreasing by 0.1% in the last quarter.

Analysts noted that sticky inflation is impacting consumers’ purchasing power, resulting in weak consumption, resembling mild stagflation. Atsushi Takeda, chief economist at Itochu Research Institute, expressed shock at the results and suggested that the possibility of a BOJ rate hike in March is now virtually eliminated.

The weakening yen, reaching levels not seen since November, could contribute to inflationary pressure in the coming months. Despite these challenges, net exports contributed 0.2 percentage points to growth, driven by increased exports in December. Looking ahead, external demand may face challenges in supporting growth in 2024 as Japan’s key trading partners are expected to experience a slowdown in economic recovery.

Also Read: Japan Drops to Fourth-Largest Economy Amid Recession

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