Japan slides into recession allowing Germany to overtake the world's third largest economy

Hong Kong/Tokyo
CNN
—

Japan's economy unexpectedly contracted due to weak domestic consumption, pushing the country into recession and causing it to lose its position as the world's third largest economy behind Germany.

GDP contracted at an annual pace of 0.4% in the last three months of 2023, the Cabinet Office said. He said on ThursdayAfter contracting by 3.3% on an annual basis In the previous quarter. A recession is usually defined as two consecutive quarters of economic contraction.

The decline was much lower than market expectations. Economists polled by Reuters had expected GDP growth of 1.4% on an annual basis on a quarterly basis in the months from October to December.

The data confirms that the Japanese economy was the fourth largest economy in the world after Germany in terms of value in US dollars last year.

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

Private consumption – which accounts for half the economy – fell by an annualized 0.9% in the fourth quarter, as Japanese consumers suffered from higher prices for food, fuel and other goods. It marks the third consecutive quarter of falls.

Neil Newman, a Japanmacro strategist based in Tokyo, told CNN that Japan imports 94% of its basic energy needs and 63% of its food, so a weak yen contributes significantly to the high cost of living.

The yen has fallen 6.6% against the US dollar since the beginning of this year, making it one of the worst performing currencies among currencies. Used by the Group of Ten Industrialized Countries.

“Private consumption was particularly weak, [and] He said that market expectations were stable. “Unfortunately, it will get worse in January after the Sea of ​​Japan earthquake. People stop spending in times of natural disasters.”

An earthquake shook the Noto Peninsula in central Ishikawa Prefecture on January 1, causing buildings to collapse, spark fires and trigger tsunami warnings as far away as eastern Russia. More than 200 people died and more than 1,000 were injured.

During the fourth quarter, capital expenditures also decreased for the third consecutive quarter by 0.3%. Private sector investments in the housing sector declined by 4%.

However, external demand supported overall growth. Exports jumped 11% year-on-year compared to the previous quarter, supported by a weak yen. Especially internal consumption Including tourist spending, it rose sharply.

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

Some economists say the recession is likely to moderate in the coming months.

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

After declining late last year, private consumption is expected to improve in the current quarter due to stable inflation and expected growth in wages. On the investment side, strong corporate profits and strong demand for IT will also lead to an increase in investment in utilities, she added.

Analysts at Capital Economics say business and labor market surveys paint a rosier picture of the business environment than the headline numbers suggest.

The unemployment rate fell to an eleven-month low of 2.4% in December. Moreover, the Tankan survey conducted by the Bank of Japan showed that business conditions across all industries and company sizes were the strongest since the fourth quarter of 2018, they said.

They added that it is possible that the government will revise the fourth-quarter numbers upwards next month during the regular review.

Goldman Sachs said on Thursday that it expects the Japanese economy to grow by 1%. In the first quarter of 2024.

“We expect domestic consumption to slow from the rapid rise in October-December, but we still expect a moderate upward trend,” its analysts said, adding that capital spending may also rebound by 1.3% over the same period.

Analysts from Capital Economists said they expect fourth-quarter GDP to be revised upward in March and that the GDP numbers are unlikely to prevent the Bank of Japan from ending negative interest rates in April.

Investors in the country remain optimistic. The Japanese stock market had an exceptional year in 2023, with the Nikkei rising 28%, making it the best-performing market in Asia.

On the same day, Morgan Stanley reiterated its bullish view on Japanese stocks: “[It is] Our biggest [overweight] A recommendation in our world of coverage.

The rise in Japanese stocks was mainly driven by ongoing corporate reforms and improving returns on equity, while a weaker yen also helped boost earnings for Japanese exporters, according to analysts from Eastspring Investments.

— CNN's Juliana Liu and Junko Ogura contributed reporting