TOKYO: Japan unexpectedly slipped into a recession at the end of last year, losing its title as the world’s third-biggest economy to Germany and raising doubts about when the central bank would begin to exit its decade-long ultra-loose monetary policy.
Some 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 an economic recovery.
“What’s particularly striking is the sluggishness in consumption and capital expenditure that are key pillars of domestic demand,” said Yoshiki Shinke, senior executive economist at Dai-ichi Life Research Institute.
“The economy will continue to lack momentum for the time being with no key drivers of growth.”
Japan’s gross domestic product (GDP) fell an annualised 0.4 per cent in the October-December period after a 3.3 per cent slump in the previous quarter, government data showed on Thursday (Feb 15), confounding market forecasts for a 1.4 per cent increase.
Two consecutive quarters of contraction are typically considered the definition of a technical recession.
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 per cent target.
“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,” said Stephan Angrick, senior economist at Moody’s Analytics.”This makes it harder for the central bank to justify a rate hike, let alone a series of hikes.”
Economy minister Yoshitaka Shindo stressed the need to achieve solid wage growth to underpin consumption, which he described as “lacking momentum” due to rising prices.
“Our understanding is that the BOJ looks comprehensively at various data, including consumption, and risks to the economy in guiding monetary policy,” he told a news conference after the data’s release, when asked about the impact on BOJ policy.
Japan’s nominal GDP stood at US$4.21 trillion in 2023, falling below US$4.46 trillion for Germany to rank as the world’s fourth-largest economy, the data showed.
“The overtaking … in size in dollar terms owes a lot to the recent collapse in the yen. Japan’s real GDP has actually outperformed Germany’s since 2019,” said Fitch Ratings economist Brian Coulton.
Germany’s heavily export-dependant manufacturers have been hit particularly hard by soaring energy prices in the wake of Russia’s invasion of Ukraine.
Europe’s biggest economy has also been hampered by the European Central Bank raising interest rates in the eurozone as well as uncertainty over its budget and chronic shortages of skilled labour.
FALLING POPULATION
Japan is also heavily reliant on exports, in particular cars, although the weak yen – making exports cheaper – has helped big firms like Toyota offset weakness in key markets such as China.
But it is suffering more than Germany in terms of worker shortages as its population falls and birth rates remain low, and economists expect the gap between the two economies to widen.
“Like Japan, Germany’s population has been declining, but it has nevertheless achieved steady economic growth,” said Toshihiro Nagahama, economist at Dai-ichi Life Research Institute.
“This is because, especially since the 2000s, the government authorities in Germany have been actively implementing policies to create an environment that makes it easier for companies to operate in the country,” he said.
SOUL-SEARCHING
During its boom years of the 1970s and ’80s, some projected that Japan would become the world’s biggest economy.
But the catastrophic bursting of Japan’s asset bubble in the early 1990s led to several “lost decades” of economic stagnation and deflation.
When in 2010 Japan was overtaken as number two by Asian rival China – whose economy is now around four times larger – it prompted major soul-searching.
While largely a product of the yen’s slide, falling behind Germany will still be a blow to Japan’s self-esteem and add to the pressure on unpopular Prime Minister Fumio Kishida.
More humiliation is to come with booming India projected to overtake Japan in 2026 and Germany in 2027 in terms of output – although not in GDP per capita – according to the International Monetary Fund.
Germany and Japan “are shrinking in terms of contribution to global growth in favour of faster-growing ones … because their productivity is already very high and it is very hard to increase it”, said Natixis economist Alicia Garcia-Herrero.
“Of course, both Germany and Japan could take measures to mitigate this. The most obvious one is allowing for more immigration or increasing the fertility rate,” she told AFP.
Japan “has not made progress in raising its own growth potential”, Japanese financial daily the Nikkei said in a recent editorial.
“This situation should be taken as a wake-up call to accelerate neglected economic reforms.”
Source: Agencies/ec
