Japan slipped into recession, allowing it to overtake Germany to become the world's third largest economy

Hong Kong/Tokyo

Japan's economy shrank unexpectedly due to weak domestic consumption, pushing the country into recession and losing its position as the world's third-largest economy to Germany.

Gross domestic product (GDP) contracted at an annualized pace of 0.4% in the last three months of 2023, the Cabinet Office said. said Thursday3.3% per annum after contract In the previous quarter. A recession is usually defined as two consecutive quarters of economic contraction.

The decline was less than market forecasts. Economists polled by Reuters had expected GDP to grow by an annualized 1.4% in the October-December quarter.

The data confirms that Japan's economy was the world's fourth largest in terms of US dollars last year, behind Germany's.

Domestic demand was particularly weak. All major domestic demand categories, including consumer spending, were negative. Only external demand captured by exports of goods and services contributed positively.

Private consumption – which accounts for about half of the economy – fell 0.9% annually in the fourth quarter as Japanese consumers struggled with higher prices for food, fuel and other goods. This marks the third quarter of decline.

Japan imports 94% of its basic energy needs and 63% of its food, so the weaker yen contributes significantly to the higher cost of living, Neil Newman, a Tokyo-based strategist at Japan Macro, told CNN.

The yen has fallen 6.6% against the US dollar since the start of the year, making it one of the worst performers among currencies. Used by the Group of 10 industrialized nations.

“Private consumption was particularly weak, [and] He said market expectations were for it to be flat. “Unfortunately, it will get worse in January following the Sea of ​​Japan earthquake. People stop spending during natural disasters.

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An earthquake struck the Noto Peninsula in the central prefecture of Ishikawa on Jan. 1, collapsing buildings, sparking fires and triggering tsunami warnings as far east as Russia. More than 200 people died and more than 1000 were injured.

In the fourth quarter, capital expenditures also fell by 0.3%, the third consecutive quarter. Private sector housing investment fell by 4%.

However, external demand supported overall growth. Exports rose 11% annualized from the previous quarter, helped by a weaker yen. Specifically, incoming consumption, Including tourist spending, has risen sharply.

Despite falling into a technical recession, Japan's markets remained buoyant, with the benchmark Nikkei 225 advancing 1.2% and surpassing the 38,000 level for the first time since 1990.

Some economists say the recession will moderate in the coming months.

“Despite the disappointment [fourth-quarter] The result, we expect [first quarter] 2024 GDP will rebound,” said Min Ju Kang, senior economist at ING Group.

After a slump late last year, private consumption should improve in the current quarter, given stability in inflation and expected growth in wages. On the investment side, strong corporate earnings and solid demand for IT will lead to an increase in facility investment, he added.

Analysts of capital economics say business surveys and the labor market paint a better picture of the business environment than the headline numbers suggest.

The unemployment rate fell to an eleven-month low of 2.4% in December. Also, the Bank of Japan's Tangan survey showed that business conditions across all industries and firm sizes remained strong from the fourth quarter of 2018.

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The government is likely to revise the fourth-quarter figures next month during a regular review, they added.

Goldman Sachs said Thursday it expects Japan's economy to grow by 1% In the first quarter of 2024.

“We expect inbound consumption to decelerate from a faster rise in October-December, but expect a more moderate pick-up,” its analysts said, adding that capital spending will also increase by 1.3% in the same period.

Analysts at Capital Economists said fourth-quarter gross domestic product in March was likely to be revised upward, and GDP figures were unlikely to prevent the Bank of Japan from ending negative interest rates in April.

Investors in the country are bullish. Japan's stock market had an exceptional year in 2023, with the Nikkei index rising 28% to become the best-performing market in Asia.

On the same day, Morgan Stanley reiterated its positive view on Japan's stocks: “[It is] Our biggest [overweight] recommendation in our coverage universe.”

According to analysts at EastSpring Investments, the rally in Japan's stocks was mainly driven by ongoing corporate reforms and improving returns on shares, while a weaker yen helped boost profits for Japanese exporters.

— CNN's Juliana Liu and Junko Ogura contributed reporting

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