Why Japan slips into recession and loses crown as world's third-largest economy?

(Xinhua) 13:44, February 16, 2024

TOKYO, Feb. 16 (Xinhua) -- Japan's economy shrank for the second quarter in a row in the October-December period, a sign of economic recession, as the country also dropped to the fourth place in the global economic rankings amid troubled fundamentals.

According to preliminary data released by the Cabinet Office on Thursday, Japan's real gross domestic product (GDP), the total value of goods and services produced in Japan adjusted for inflation, fell by 0.1 percent from the previous quarter during the fourth quarter (Q4) in 2023, following a 0.8-percent decrease registered in Q3.

This translated to an annualized decline of 0.4 percent in the real GDP, marking the second consecutive quarter of negative growth after a 3.3-percent decrease seen in Q3.

Meanwhile, Japan lost its status as the world's third-largest economy to Germany in dollar terms, as its nominal GDP for 2023, unadjusted for inflation, stood at 4.21 trillion U.S. dollars, less than the size of the German economy which totaled 4.46 trillion U.S. dollars.

One notable factor contributing to Japan's GDP being surpassed by Germany in 2023 is the significant decrease of Japan's domestic self-sufficiency rate and what sets Japan apart from Germany significantly is the remarkably low level of inward direct investment, said Toshihiro Nagahama, chief economist at Japan's Dai-ichi Life Research Institute.


Local analysts pointed out that Thursday's data was surprisingly worse than local economists' estimate of an annualized expansion, and that two straight quarters of contraction signaled a technical recession for the economy.

"While it's not an official recession, foreign investors may interpret it as a technical recession with two consecutive quarters of negative growth," said Nagahama.

Following the downturn in the July-September quarter, except for external demand, the overall situation has deteriorated, indicating unfavorable conditions, the economist noted.

"Moreover, if we extend the Ministry of Economy, Trade and Industry's estimated or forecasted index of industrial production, which has a high correlation with real GDP, it seems that there will be a significant decrease in production in the January-March quarter," said Nagahama.

Citing special factors such as the Noto Peninsula earthquake and production halts by certain auto manufacturers, the economist said that based on the production trends, it is possible for the Japanese economy to experience a third consecutive quarter of contraction.


In the October-December period, private consumption, which accounts for more than half of Japan's GDP, fell 0.2 percent, while business investment contracted 0.1 percent, both experiencing negative growth for three consecutive quarters.

Imports, whose growth impacts GDP negatively, expanded 1.7 percent, while exports grew 2.6 percent.

Thursday's data also showed that for all of 2023, Japan's GDP in real terms expanded by 1.9 percent, with a 5.7-percent growth in nominal terms.

In terms of contribution to Japan's economic growth, while external demand contributed positively by 0.2 percentage points to Q4 growth last year, domestic demand contributed negatively by 0.3 percentage points due to factors such as sluggish consumption.

Analysts pointed out that subdued domestic demand prevented Japan from escaping negative growth during the quarter, and that the primary reason for Japan's weak domestic demand is attributed to persistent inflation with wage increases lagging behind price hikes, resulting in suppressed household purchasing power.

In 2023, real wages in Japan decreased by 2.5 percent from the previous year, marking two consecutive years of decline, data from the Ministry of Health, Labour and Welfare showed.

Meanwhile, a survey conducted by the Ministry of Internal Affairs and Communications showed that average monthly real household consumption expenditure in Japan decreased by 2.6 percent in 2023 compared to the previous year.

The weak yen, which shoved Japan down to the fourth-largest economy, is also causing ongoing inflation.

Data from the Ministry of Internal Affairs and Communications showed that as of December last year, Japan's core consumer price index has exceeded the Bank of Japan's (BOJ's) 2-percent target for 21 consecutive months. However, both the Japanese government and the central bank are still undecided on whether to confirm Japan's exit from deflation.

In order to facilitate Japan's prompt achievement of a virtuous cycle of price and wage increases and help Japan overcome deflation, the government is promoting various measures such as tax cuts to encourage companies to raise wages. Increases in nominal wages, especially those of large corporations in the country since last year, have been failing to catch up with price hikes, and insufficient domestic demand continues to plague Japan's economic growth.

The continuous decline in real wages also poses a dilemma for the BOJ amid prominent market distortions and side effects due to the prolonged period of ultra-loose monetary policy in Japan. There is a high expectation both at home and abroad for the central bank to exit its negative interest rate policy.

Some experts pointed out that with the U.S. Federal Reserve's potential rate cuts this year, the window of opportunity for the BOJ to take reverse action and move towards tightening is limited, and action may be taken before U.S. rate cuts.

Currently, it is widely expected by the media and experts that the BOJ will not announce its exit from negative interest rates too far in the future, and the earliest announcement may be made at the monetary policy meeting in March or April this year.


Due to the less-than-ideal economic indicators, many market watchers here are concerned about the overheating of the Tokyo stock market.

Masanari Takada, strategist at J.P. Morgan Securities Japan, said it is evident that the influx of buying orders exceeds the economic fundamentals, leading to overheating here in Tokyo.

While the Japanese stock market continues to rise, there are signs of a slowdown in the real economy, resulting in a stark "discrepancy," according to an article published by the Japanese business daily Nihon Keizai Shimbun.

Local media and experts widely believe that although positive factors such as rising prices and improving wages have been observed in the Japanese economy since last year, a virtuous cycle has yet to be formed. These factors have not become the fundamental reasons supporting the recent rise in the stock market.

Surges in the Tokyo market rely heavily on speculative activities by foreign capital amid the yen's depreciation, with foreign investors accounting for about 70 percent of the trading volume, and the rallies were largely driven by a few large-cap stocks. The market is prone to experience severe volatility if foreign capital flows out.

With major central banks globally continuing to raise interest rates, the BOJ's adherence to its negative interest rate policy is the main reason behind the weak yen. The continued rise of the Japanese stock market this year is partly due to the postponement of market expectations for the United States to start rate cuts and for the BOJ to switch to tightening.

Nagahama attributed the continuous rise of the Tokyo stock market to the depreciation of the yen. If the BOJ decides to cancel the negative interest rate policy after March, the factors currently boosting the stock market may disappear and lead to an adjustment phase in the spring. It will also have a significant impact on the global financial and monetary environment as well as the Japanese economy.

In addition, several local experts have pointed out that the continuous rate hikes have made the U.S. financial and real estate sectors fragile, and with multiple uncertainties facing the U.S. economy in 2024, various risks will significantly impact the overheated Tokyo stock market. 

(Web editor: Peng Yukai, Liu Ning)


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