Germany Becomes Third-Biggest Economy As Japan Slips Into Recession

Government data released on Thursday revealed that Japan's GDP fell by an annualised 0.4 per cent in the October-December period following a 3.3 per cent decline in the previous quarter

Factors such as weak demand in China, sluggish consumption, and production halts at a unit of Toyota Motor are all contributing to a challenging path toward Japan's economic recovery.

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Germany became the world’s third-largest economy as Japan slipped into a recession at the close of last year forfeiting its position. According to a report by Reuters, this development has raised concerns regarding the timeline for the Bank of Japan’s exit from its decade-long ultra-loose monetary policy.

Analysts are cautioning about the possibility of another contraction in the current quarter. Factors such as weak demand in China, sluggish consumption, and production halts at a unit of Toyota Motor Corp are all contributing to a challenging path toward economic recovery and policymaking.

Yoshiki Shinke, senior executive economist at Daiichi Life Research Institute, highlighted the sluggishness in consumption and capital expenditure, which are fundamental pillars of domestic demand. He expressed concerns that the economy will continue to lack momentum without significant drivers of growth.

Government data released on Thursday revealed that Japan's gross domestic product (GDP) fell by an annualised 0.4 per cent in the October-December period following a 3.3 per cent decline in the previous quarter. These figures contradicted market forecasts, which anticipated a 1.4 per cent increase.

The consecutive quarters of contraction meet the technical definition of a recession. While many analysts still anticipate the Bank of Japan to phase out its massive monetary stimulus this year, the weak data may cast doubt on its forecast that rising wages will support consumption and maintain inflation around its 2 per cent target.

Stephan Angrick, senior economist at Moody's Analytics, said the significance of the GDP decline and consecutive drops in domestic demand. He stated that these factors make it challenging for the central bank to justify a rate hike, let alone a series of hikes.

Japan’s economy minister Yoshitaka Shindo stressed the necessity of achieving solid wage growth to bolster consumption, which he described as lacking momentum due to rising prices. He mentioned that the Bank of Japan considers various data, including consumption, and risks to the economy when guiding monetary policy.

Following the release of the data, the yen remained steady, standing at 150.22 per dollar. Yields on Japanese government bonds decreased as some traders adjusted their expectations for an early Bank of Japan policy shift. The benchmark 10-year yield dropped 4 basis points to 0.715 per cent. Meanwhile, the Nikkei stock average surged to 34-year highs, with the data reinforcing recent assurances from the Bank of Japan regarding low borrowing costs even after ending negative rates.

Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities, remarked on the difficulty the Bank of Japan faces in pivoting toward monetary tightening due to weak domestic demand. She noted that the hurdle for ending negative rates in March has risen.

Concerning economic indicators, private consumption, which accounts for over half of economic activity, fell by 0.2 per cent, contrary to market expectations of a 0.1 per cent gain. Capital expenditure, another significant driver of private-sector growth, declined by 0.1 per cent compared to forecasts of a 0.3 per cent gain. Both consumption and capital expenditure have shrunk for the third consecutive quarter.

While big companies anticipate a significant increase in capital expenditure for the fiscal year ending in March, actual investment may be delayed due to rising raw material costs and labour shortages. Recent machinery orders data, considered a leading indicator of capital spending, showed a contraction in November, casting doubt on the Bank of Japan's expectation of robust investment supporting the economy.

External demand, represented by exports minus imports, contributed 0.2 percentage point to GDP growth, with exports rising by 2.6 per cent from the previous quarter.