Japan Slips into Recession, Loses Spot as World’s Third-Largest Economy to Germany
Japan, once the second-largest economy in the world, has unexpectedly slipped into a recession, losing its spot as the world’s third-largest economy to Germany. The Asian giant reported two consecutive quarters of contraction, with a 0.4% annualized contraction in the fourth quarter following a revised 3.3% contraction in the third quarter. This news comes as a surprise, as economists had forecasted a 1.4% growth for the fourth quarter.
A recession is defined as two consecutive quarters of contraction, and Japan’s recent economic performance has raised concerns. On a quarter-on-quarter basis, GDP slipped 0.1%, falling short of the expected 0.3% rise. These disappointing figures highlight the challenges Japan is facing in its economic recovery.
In contrast, Germany has seen its economy grow, surpassing Japan to become the world’s third-largest economy. Germany’s nominal GDP grew by 6.3% to reach 4.12 trillion euros, or $4.46 trillion based on last year’s average exchange rate. Meanwhile, Japan’s nominal GDP grew by 5.7% to come in at 591.48 trillion yen, or $4.2 trillion based on the average exchange rate in 2023.
Nominal GDP measures the value of output in current dollars without adjusting for inflation. While Japan’s nominal GDP has shown some growth, it is not enough to maintain its position as the world’s third-largest economy.
The news of Japan’s recession has had an impact on the financial markets. In response to the latest GDP release, the benchmark Nikkei 225 climbed 0.65% and briefly surpassed the 38,000 mark in the morning session. Investors interpreted the weak economic reading as a sign that the Bank of Japan could delay its exit from the country’s long-standing negative interest rate policy. This speculation led to a positive market response.
The yen, Japan’s currency, has also been affected by the news. It continued to hover around the 150 mark against the dollar, trading at 150.2 as of 1:55 p.m. Tokyo time. The uncertain economic outlook has contributed to the yen’s stability against the dollar.
The dire growth picture presented by Japan’s recession poses challenges for the Bank of Japan in terms of tightening its policy. Charu Chanana, head of FX strategy at Saxo Markets, commented on the situation, stating, “This dire growth picture makes it even more difficult for the BOJ to tighten policy.” The weak economic performance raises doubts about whether inflation is truly driven by a virtuous cycle of increased real income and spending.
Japan’s slip into recession and loss of its position as the world’s third-largest economy to Germany is a significant development. It highlights the challenges Japan faces in its economic recovery and raises questions about the effectiveness of its policies. As Japan navigates through this difficult period, it will be crucial for policymakers to address the underlying issues and implement measures to stimulate growth and restore confidence in the economy.