Japan’s Economy Enters Technical Recession as High Inflation Stifles Growth
Japan’s economy has entered a technical recession, as it unexpectedly contracted again in the October-December period, according to provisional government data. The contraction was primarily due to high inflation, which has crimped domestic demand and private consumption in what is now the world’s fourth-largest economy.
The latest gross domestic product (GDP) print poses challenges for Bank of Japan Governor Kazuo Ueda and Japanese Prime Minister Fumio Kishida. It also means that Germany has taken Japan’s place as the third-largest economy in the world in dollar terms.
In the fourth quarter, provisional GDP contracted by 0.4% compared to the previous year, following a revised 3.3% slump in the July-September period. This figure was significantly lower than the median estimate of 1.4% growth among economists surveyed by Reuters. The GDP deflator in the fourth quarter stood at 3.8% on an annualized basis.
Additionally, the Japanese economy contracted by 0.1% in the fourth quarter compared to the previous quarter, after shrinking by a revised 0.8% in the third quarter. This was also weaker than the expected 0.3% expansion.
However, there is debate over whether Japan has officially entered a recession. Marcel Thieliant, Capital Economics’ head of Asia-Pacific, noted that while job vacancies have weakened, the unemployment rate dropped to an eleven-month low of 2.4% in December. Furthermore, the Bank of Japan’s Tankan survey indicated that business conditions across all industries and firm sizes were the strongest they’ve been since 2018 in Q4.
Regardless, Thieliant believes that growth will remain sluggish this year due to the negative household savings rate.
One of the main factors contributing to the economic downturn is high inflation and weak domestic demand. Private consumption declined by 0.2% in the fourth quarter compared to the previous quarter, contrary to the median estimate for a 0.1% expansion.
Although inflation has been gradually slowing, the “core core inflation,” which excludes food and energy prices, has exceeded the Bank of Japan’s 2% target for 15 consecutive months. Despite this, the bank has continued with its negative-rate regime.
However, the weaker-than-expected GDP print raises questions about the BOJ’s preference for inflation to be driven by domestic demand. The bank believes that wage increases would lead to a more meaningful spiral, encouraging consumers to spend.
Market analysts expect the BOJ to move away from its negative rates regime at its April policy meeting, once the annual spring wage negotiations confirm a trend of significant wage increases. However, the disappointing growth figures suggest that high inflation is impeding domestic consumption, potentially strengthening the case for looser monetary policy for a longer period.
In conclusion, Japan’s economy has entered a technical recession due to high inflation stifling growth. The weaker-than-expected GDP figures raise concerns about the Bank of Japan’s preference for inflation driven by domestic demand. Despite the prospect of higher wages, high inflation continues to hinder domestic consumption. As Japan navigates these challenges, it remains to be seen how policymakers will address the need for sustained economic growth.