HomeEconomic IndicatorJapan's economy unexpectedly enters recession, while Germany becomes the world's third-largest economy.

Japan’s economy unexpectedly enters recession, while Germany becomes the world’s third-largest economy.

Japan Unexpectedly Slips into Recession, Germany Now World’s Third-Biggest Economy

Japan’s Economic Downturn

Japan unexpectedly slipped into a recession at the end of last year, losing its title as the world’s third-biggest economy to Germany. This has raised doubts about when the central bank will begin to exit its decade-long ultra-loose monetary policy.

Challenges Ahead

Analysts are warning of another contraction in the current quarter as weak demand in China, sluggish consumption, and production halts at a unit of Toyota Motor Corp all point to a challenging path to economic recovery.

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Sluggishness in Domestic Demand

Yoshiki Shinke, senior executive economist at Dai-ichi Life Research Institute, expressed concern about the sluggishness in consumption and capital expenditure, which are key pillars of domestic demand. He believes that the economy will continue to lack momentum for the time being with no key drivers of growth.

Economic Data

Japan’s gross domestic product (GDP) fell an annualised 0.4% in the October-December period, confounding market forecasts for an increase. Two consecutive quarters of contraction are typically considered the definition of a technical recession.

Impact on Monetary Policy

While many analysts still expect 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 underpin consumption and keep inflation durably around its 2% target.

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Market Reaction

The yen was steady after the data, and yields on Japanese government bonds fell as some traders pushed back bets of an early BOJ policy shift. The benchmark 10-year yield slid, and the data further underpinned recent reassurances from the BOJ that borrowing costs will stay low even after ending negative rates.

Global Economic Forecast

The International Monetary Fund revised up its global growth forecast in January as the outlook for the United States and China brightened, but warned of risks including geopolitical tensions in the Middle East. This has implications for Japan’s economic recovery.

Private Consumption and Capital Expenditure

Private consumption and capital expenditure shrank for the third straight quarter, as rising living costs and warm weather discouraged households from spending. Analysts point to a delay in actual investment due to rising raw material costs and labor shortages.

BOJ Policy Outlook

The BOJ has been laying the groundwork to end negative rates by April and overhaul other parts of its ultra-loose monetary framework. An exit from accommodative policy would come at a time when the U.S. Federal Reserve is pausing after aggressive interest rate hikes.

Corporate Spending Plans

Some analysts say Japan’s tight labor market and robust corporate spending plans are keeping alive the chance of an early exit from ultra-loose policy. This may have implications for the overall economic landscape in the coming months.

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