Japan economy slips into recessionat the end of last year, relinquishing its position as Germany's third-largest economy globally and casting doubt on when the central bank would start withdrawing its ultra-loose monetary policy of a decade. The sluggish consumption and production halts at a division of Toyota Motor Corp (7203.T), which opens a new tab, feeble demand in China, and sluggish consumption collectively indicate a difficult path to economic recovery, prompting some analysts to forecast another contraction in the current quarter.
People walking past a busy crossing in Tokyo, Japan on November 15, 2023 Japan's economy has unexpectedly contracted, leading the nation into a recession and causing it to slip from its position as the world's third-largest economy to be overtaken by Germany. The latest data from the Cabinet Officereveals that the Gross Domestic Product (GDP) shrank at an annualized rate of 0.4% in the final quarter of 2023, following a contraction of 3.3% in the preceding quarter. This decline in economic performance has caught analysts off guard, as market expectations were for GDP to grow by an annualized 1.4% quarter-on-quarter during the October to December period. The data confirms that Japan's economy, in termsof US dollars, ranked fourth globally in the previous year, trailing behind Germany. The primary driver of the economic downturn was weakened domestic demand, with all major categories, including consumer spending, recording negative figures. Only external demand, primarily fueled by exports of goods and services, managed to contribute positively. Private consumption, which constitutes half of the economy, fell by an annualized 0.9% in the fourth quarter, marking the third consecutive quarter of decline.
A significant factor contributing to the decline in private consumption is the rising cost of living for Japanese consumers. The weak yen, which has depreciated by 6.6% against the US dollar since the beginning of the year, has led to higher prices for essential commodities such as food and fuel.
Neil Newman, a Tokyo-based strategist at Japanmacro, pointed out that Japan's dependence on imports for 94% of its base energy requirements and 63% of its food exacerbates the impact of the weak yen.
Furthermore, a seismic event in the form of the Sea of Japan earthquake on January 1 has added to the economic challenges. Neil Newman anticipates a further decline in consumer spending due to the aftermath of the natural disaster.
Despite falling into a technical recession, Japan's financial markets have remained resilient. The benchmark Nikkei 225 index has even experienced a 1.2% gain, closing above the 38,000 level for the first time since 1990.
Economists, however, expressed optimism about a potential economic recovery in the coming months. Min Joo Kang, a senior economist at ING Group, expects a rebound in GDP in the first quarter of 2024, citing stabilization in inflation, anticipated wage growth, and positive corporate earnings. Analysts at Capital Economics also point to business surveys and a robust labor market as indicators of a more positive business environment than the headline GDP figures suggest.
The unemployment rate in December reached an eleven-month low of 2.4%, and the Bank of Japan's Tankan survey highlighted the strongest business conditions across all industries and firm sizes since the fourth quarter of 2018.
Notably, Japan's equities market had a remarkable performance in 2023, with the Nikkei index surging by 28%, making it the best-performing market in Asia. Despite the economic challenges, analysts from Morgan Stanley reiterated their bullish view on Japan's equities, designating it as the largest overweight recommendation in their coverage universe.
The ongoing corporate reforms and improvements in return on equities, coupled with the depreciation of the yen benefiting Japanese exporters, have been identified as key factors driving the rally in Japan's equities, according to analysts from Eastspring Investments.
Japan's economy has entered a recession, contracting for two consecutive quarters due to sluggish domestic demand, according to recent data. The unexpected downturn has resulted in Japan conceding its position as the world's third-largest economy to Germany.