Japan Slip into the Recession – Can Japan Recover in 2024?
Many may be aware that Japan Slip into recession. In this article, we are going to find out how did Japan Slip into recession and can Japan recover from it in 2024. On 15th Feb 2024, government data released showed that Japan has not only slipped into recession but also lost its third-largest economy status to Germany. Now, let’s get started
How Did Japan Slipped into Recession
Japan became the second-largest economy in the late 1960s. Currently, Japan slipped to the fourth-largest economy. The Journey of Japan to the top of the economic rankings is a reflection of a nuanced past. Japan has experienced all types of natural calamities, including asset bubbles in the early 1990s along with prolonged stagnation.
The highest inflation in decades is hurting households and Business spending. For the past three consecutive quarters, consumers and companies trimmed their expenditures, as wages failed to keep up with inflation. The Bank of Japan (BoJ) welcomes stable inflation, however, the effects of present price hikes on domestic consumption outweigh the benefits from export gains and growth in spending of incoming tourism expenditure.
Paradoxical Stock Market
For the first time since 1989, when an asset-price bubble popped, Japan’s stock market has finally set a new record high after decades of economic stagnation. The Nikkei Index was up 2.2% close to 39,098.68 points, on Thursday (i.e. 22nd February 2024) – higher than its previous record high on 29th December 1989.
Despite Japan’s slip into recession, the Stock market has broken the previous 34-year-old record high. According to analysts “Nikkei has finally thrown off its shackles” – with this new record high. The factors pushing investors into the Japanese stock market is due to corporate governance changes/ profits, return of inflation and China’s gloomy economic outlook. The key driver of corporate profits and share prices is the weak yen.
Source: This is money via an MSN article
The inflation along with the anticipated exit from negative rates later this year (since 2016) is encouraging companies to expand and improve their business.
Many analysts and experts believe that this stock market rally may not be sustained. The reason they state is Japan is looked at only as an alternative to China, as the foreign investors have taken out $29 billion from the Chinese stock market – this is around 90 percent of inward investment in 2023. Some analysts and economists see this Stock Market High as paradoxical as it is completely wary of the economic fundamentals
Can Japan Recover – What will the Bank of Japan do next?
As many are aware Japan has entered a recession according to its National Income data which was released two weeks before. Many countries in the world have increased or started to increase their interest to combat inflation. But, Japan has kept its interest rate negative for a longer period. The Central Bank has announced that they are trying to raise the interest rate this year.
Many economists forecast that the central bank may increase interest rates out of negative territory; but, will keep it at zero interest rates for the rest of the year. Strong Corporate profits, inflation and market rally can be an indicator for BoJ to increase its interest rate sooner. However, BoJ may not be in a hurry to do so, though it may increase the interest rate this year.
On 16th February 2024, Reuters news agency stated that when the lawmaker asked how weaker-than-expected GDP data could affect the timing of an exit, BoJ Governor Kazuo Ueda stated that “We’d like to scrutinise whether Japan’s economy continues to recover moderately, and whether a positive wage-inflation cycle would be sustained”
He also stated that “Once a positive wage-inflation cycle kicks off and sustained achievement of our price target comes into sight, we will examine whether or not to sustain our massive stimulus measures, including negative interest rates”
On 17th February 2024, the Japan Times stated that “Finance Minister Shunichi Suzuki said there will likely come a time when the country’s interest rates will begin to rise and affect the economy through various channels, according to an interview with the Nikkei newspaper published Saturday”.
The BoJ has a strong view and has always argued that higher pay is required to generate stable inflation and growth in the economy. The BoJ Governor has also stated that he does not need to wait for all wage results before making decisions on interest rate hikes.
Japan may recover from the recession soon. It may also regain its third-largest economy spot, provided the yen gains against the dollar.
Conclusion
Japan should implement all its announced reforms and should also move away from its negative interest rate. With the prevailing state of the economy, the BoJ (i.e. Central Bank) decision to raise interest rates can potentially boost the weak Yen. Which may be helpful for Japan to recover soon. However, when to increase the interest rate will be a big question for policymakers.
Japan may recover from its recession soon and also may regain its third-largest economy spot. I reiterate “Japan is having more challenges, and it is really a tough time ahead. The ageing population is more concerned than any other thing.”
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