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Japan Unexpectedly Slips into Recession, Losing World’s Third-Largest Economy Status to Germany

Tokyo, February 15, 2024, The Europe Today: In a surprising turn of events, Japan has unexpectedly fallen into a recession, relinquishing its status as the world’s third-largest economy to Germany. The latest government data revealed that Japan’s Gross Domestic Product (GDP) contracted an annualized 0.4% in the October-December period, following a 3.3% decline in the previous quarter. This unexpected downturn has raised uncertainties about the timing of the Bank of Japan’s (BOJ) exit from its decade-long ultra-loose monetary policy.

Two consecutive quarters of contraction meet the technical definition of a recession, catching markets off guard as forecasts anticipated a 1.4% increase in GDP. The weak economic performance may challenge the BOJ’s projections that rising wages would support consumption and maintain inflation around the 2% target.

Stephan Angrick, Senior Economist at Moody’s Analytics, commented on the data, stating, “Two consecutive declines in GDP and three consecutive declines in domestic demand are bad news, even if revisions may change the final numbers at the margin. This makes it harder for the central bank to justify a rate hike, let alone a series of hikes.”

Economy Minister Yoshitaka Shindo underscored the importance of achieving solid wage growth to bolster consumption, acknowledging the current lack of momentum due to rising prices. Shindo emphasized the BOJ’s comprehensive analysis of various data in guiding monetary policy.

The yen remained steady after the data release, and yields on Japanese government bonds fell as some traders pushed back bets on an early BOJ policy shift. The benchmark 10-year yield slid 4 basis points to 0.715%. Despite the economic challenges, the Nikkei stock average rallied to 34-year highs, reflecting recent assurances from the BOJ that borrowing costs would stay low even after ending negative rates.

Naomi Muguruma, Chief Bond Strategist at Mitsubishi UFJ Morgan Stanley Securities, commented on the impact of weak domestic demand on BOJ policy, stating, “Weak domestic demand makes it hard for the BOJ to pivot towards monetary tightening. The hurdle for ending negative rates in March has risen.”

The unexpected recession poses challenges for Japan’s economic outlook and raises questions about the central bank’s path forward as it navigates a delicate balance between economic recovery and monetary policy adjustments.