Japan slips into recession, loses third-largest economy title to Germany
In a surprising turn of events, Japan slipped into recession toward the end of 2023, causing it to lose its spot as world's third-largest economy to Germany. Japan's GDP contracted by an annualized 0.4% during the October-December period, coming after a 3.3% decline in previous quarter. This development has led to uncertainty about when Japan's central bank will start to phase out its long-standing 'ultra-loose' monetary policy. Last month, Germany's GDP was $4.5 trillion while Japan's stood at $4.2 trillion.
Factors contributing to Japan's economic challenges and looming threats
Experts are concerned about another potential contraction in the current quarter, citing weak demand in China, slow consumption, and production halts at Toyota Motors. Yoshiki Shinke, a senior executive economist at Dai-ichi Life Research Institute, emphasized the "sluggishness in consumption and capital expenditure," which are crucial components of domestic demand. He also stated that the economy will continue to struggle without any significant growth drivers.
Impact on Bank of Japan's monetary policy
This disappointing data could cast doubt on the Bank of Japan's (BOJ) prediction that increased wages will support consumption and maintain inflation around its 2% target. Stephan Angrick, a senior economist at Moody's Analytics, said that "two consecutive declines in GDP and three consecutive declines in domestic demand are bad news," making it more difficult for the central bank to justify raising interest rates.
Bank of Japan's potential response and future outlook
Although the BOJ is planning to end negative rates by April and revamp other aspects of its ultra-loose monetary framework, it is expected to proceed cautiously with subsequent policy tightening due to ongoing risks. An ultra-loose monetary policy is implemented to stimulate economic activity by significantly increasing the money supply and lowering interest rates. Marcel Thieliant, head of Asia-Pacific at Capital Economics, said that "growth is set to remain sluggish this year as the household savings rate has turned negative."
What caused contraction in Japan's economy
It is reported that the recession in Japan is mostly caused by a decline in domestic consumption which accounts for almost half of its economy. Domestic consumption fell 0.2% against a forecast of 0.1%. High prices and warmer weather mostly kept the Japanese population from spending money at restaurants or buying winter clothing.
Germany's economy is also facing a slowdown
Despite surpassing Japan as the third largest economy, Germany is also facing troubles. It reported a 0.3% decline in its GDP in 2023 compared to the year before. The European giant is grappling with a variety of factors, including chaos around budget allocation. Germany is ruled by an unstable ruling coalition which is facing farmers' protests against cutting diesel subsidies. Germany is also facing shortage of labor in skilled industries along with a drop in global growth, particularly in China.
