Japan’s economy has contracted unexpectedly because of weak domestic consumption, pushing the country into recession and causing it to lose its position as the world’s third-largest economy to Germany.
A report by CNN on Thursday quoting the Cabinet Office; said the Gross domestic product (GDP) shrank at an annualised pace of 0.4 per cent in the last three months of 2023, after having contracted by an annualized 3.3 per cent in the previous quarter.
A recession is typically defined as two consecutive quarters of economic contraction.
The decline was well below market forecasts. Economists polled by Reuters had expected GDP to grow by an annualized 1.4 per cent quarter-on-quarter in the October to December months.
The data confirms that Japan’s economy was the world’s fourth largest behind Germany in US dollar terms last year.
Domestic demand was particularly weak. All major domestic demand categories, including consumer spending, were negative. Only external demand, which is captured by exports of goods and services, made a positive contribution.
Private consumption — which accounts for half of the economy — declined by an annualised 0.9 per cent in the fourth quarter, as Japanese consumers battled higher prices for food, fuel and other goods. It marks a third straight quarter of falls.
Japan imports 94 per cent of its base energy requirements and 63 per cent of its food, so the weak yen significantly contributes to a higher cost of living, Neil Newman, a Tokyo-based strategist at Japanmacro, told CNN.
The yen has tumbled 6.6 per cent against the US dollar since the start of this year, making it one of the worst performers among currencies used by the Group of 10 industrialised nations.
“Private consumption was particularly weak, [and] market expectations were for it to be flat,” he said. “Unfortunately this will get worse in January following the Sea of Japan earthquake. People stop spending in times of natural disasters.”
A quake shook the Noto Peninsula in the central prefecture of Ishikawa on January 1, collapsing buildings, sparking fires and triggering tsunami alerts as far away as eastern Russia. More than 200 people died and more than 1,000 were injured.
During the fourth quarter, capital expenditures also dropped for a third consecutive quarter, down by 0.3 per cent. Investment in housing by the private sector tumbled by 4 per cent.
External demand, however, supported overall growth. Exports jumped by an annualised 11 per cent from the previous quarter, helped by the weak yen. In particular, inbound consumption, including spending by tourists, rose sharply.
Despite falling into a technical recession, Japan’s markets have remained buoyant, with the benchmark Nikkei 225 advancing 1.2 per cent and closing above the 38,000 level for the first time since 1990.
Some economists say the recession is likely to moderate in the coming months.
“Despite the disappointing [fourth-quarter] result, we expect [first quarter] 2024 GDP to rebound,” said Min Joo Kang, senior economist at ING Group.
After a drop late last year, private consumption should improve in the current quarter given a stabilisation in inflation and expected growth in wages. On the investment side, strong corporate earnings and solid demand for IT will also lead to increases in facility investment, she added.
Analysts at Capital Economics say business surveys and the labour market paint a rosier picture of the business environment than headline numbers suggest.
The unemployment rate dropped to an eleven-month low of 2.4 per cent in December. What’s more, the Bank of Japan’s Tankan survey showed that business conditions across all industries and firm sizes were the strongest they’ve been since the fourth quarter of 2018, they said.
The government can revise the fourth quarter figures upward next month during a regular review, they added.
Goldman Sachs said Thursday it expected Japan’s economy to notch 1 per cent growth in the first quarter of 2024.
“We expect inbound consumption to slow from the rapid rise in October-December, but still expect a moderate uptrend,” its analysts said, adding that capital expenditure could also rebound by 1.3 per cent during the same period.
Analysts from Capital Economists said they expected fourth-quarter GDP to be revised upward in March and that the GDP figures were unlikely to prevent the Bank of Japan from ending its negative interest rates in April.
The country’s investors remain bullish. Japan’s equities market had an exceptional year in 2023, with the Nikkei index up 28 per cent, making it the best-performing market in Asia.
On the same day, Morgan Stanley reiterated its bullish view on Japan’s equities: “[It is] the largest [overweight] recommendation in our coverage universe.”
The rally in Japan’s equities has been mainly driven by the ongoing corporate reforms and improving return on equities, while the weak yen also helped boost profits of Japanese exporters, according to analysts from Eastspring Investments.