Japan’s economy has faced yet another setback, slipping into a technical recession as it unexpectedly contracted in the October-December period. The provisional government data released brings to light the challenges posed by high inflation, which has crippled domestic demand and private consumption. Consequently, this has created difficulties for Bank of Japan Governor Kazuo Ueda and Japanese Prime Minister Fumio Kishida in terms of interest rate normalization and fiscal policy support, respectively.
Adding to Japan’s woes, the recent GDP figures indicate that Germany has surpassed Japan as the world’s third-largest economy in dollar terms. The provisional gross domestic product shrank by 0.4% in the fourth quarter compared to the previous year, following a revised 3.3% slump in the July-September period. This dismal performance did not align with the median estimate for 1.4% growth among economists polled by Reuters.
The GDP deflator for the fourth quarter came in at 3.8% on an annualized basis, highlighting the pressures of inflation on the Japanese economy. Moreover, the fourth quarter saw a 0.1% contraction in the economy compared to the previous quarter, which was weaker than the expected 0.3% expansion. The possibility of a recession is a subject of debate, as evidenced by conflicting data. While job vacancies have diminished, the unemployment rate dropped to an eleven-month low of 2.4% in December. The Bank of Japan’s Tankan survey also indicated that business conditions were the strongest they have been since 2018.
Nonetheless, experts predict sluggish growth in the coming year due to a negative household savings rate. Marcel Thieliant, Capital Economics’ head of Asia-Pacific, emphasizes the uncertainty surrounding Japan’s economic trajectory, highlighting the negative savings rate and sluggish growth as potential barriers to recovery. Private consumption, crucial for economic growth, declined by 0.2% in the fourth quarter, contrary to the anticipated 0.1% expansion.
Inflation has been steadily decreasing, but the so-called “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 central bank has remained committed to maintaining negative interest rates. However, the disappointing GDP results raise questions about the sustainability and stability of the BOJ’s inflation-driven domestic demand approach. The bank’s belief that wage increases would drive consumer spending may need to be reassessed.
Market analysts anticipate a shift away from the negative rates regime during the Bank of Japan’s April policy meeting. This expectation hinges on tangible wage increases resulting from the annual spring wage negotiations. However, the weaker-than-expected growth figures bring into question the effectiveness of this strategy. Despite the prospect of higher wages, the impact of high inflation on domestic consumption may require a longer period of looser monetary policy.
Japan’s economy has encountered serious challenges in recent months, pushing it into a technical recession. The repercussions of high inflation and weak domestic demand have disrupted growth and posed significant hurdles for policymakers. As Germany takes its place as the third-largest economy globally, Japan must grapple with the complexities of managing inflation and kickstarting economic recovery. The Bank of Japan’s strategies will come under scrutiny as it navigates these turbulent times, with the hope of restoring stability and sustained growth.
Leave a Reply