Japan Slips into Recession

On Thursday (i.e. 15^th Feb 2024), as government data released, Japan slipped into recession and also slipped into the world’s fourth-largest economy. The Quarterly Data showed that it unexpectedly shrank for a second straight quarter on weak domestic demand. This now leads to uncertainty about the Central Bank’s (i.e. Bank of Japan) plans to exit from its ultra-easy policy sometime later this year.

In his article we are going to see how Japan slips into the recession and slipped into the fourth-largest economy, GDP data of Japan, Negative Interest Rate and ends with my perspective/conclusion

Japan Slips to the fourth-largest Economy

In 2010, Japan fell from the second-largest economy behind the USA to the third-largest economy, as China took the second spot. Now, for the year 2023, Japan slips from the third-largest economy to the fourth-largest economy as Germany becomes the third-largest economy.

It is to be remembered that the International Monetary Fund (IMF) had forecasted, in October, that Germany is likely to overtake Japan as the third-largest economy in terms of (or when measured in) US Dollars. IMF will declare the ranking only after publishing the final figures of GDP data by both countries.

The IMF’s Deputy Head, Gita Gopinath, in a press conference in Tokyo this month (on 9^th Feb), said that an important reason for Japan losing its ranking is the yen depreciation of about 9% last year against the US dollar.

Many economists also pointed out that the weakness of the Japanese Yen against the Dollar is one reason for its fall to fourth place, and if the Yen recovers, then the country can regain its third-largest economy spot.

However, the data highlights that Japan has also gradually lost its competitiveness and productivity—due to an ageing population.

Gross Domestic Product (GDP) Data

According to preliminary data released by the Cabinet Office, for the fourth Quarter (i.e. October-December) period of 2023, the Gross domestic product (GDP) fell by an annualized of 0.4%, after the slump in the previous quarter of 3.3%. Final sales of a domestic product for the Fiscal Year is 1.4%. The latest figures provide only an initial reading of Japan’s GDP growth for the fourth quarter, and when they release the final reading, these figures may undergo revision.

The two consecutive contractions in GDP are technically called “Recession”. The data is evidence of the same. It is to be remembered that many economists had predicted that the fourth-quarter growth of Japan would be around 1 percent.

The figures of National Income Data show a gloomy outlook for the economy. The two key drivers of the economy—i.e. consumer spending and investment are lagging behind. Whereas corporate profits are at record highs, the stock market is surging and unemployment rates are low.

Capex, Private Consumption, and Net Exports

The key private-sector growth engine, capital expenditure fell by 0.1%.

Private consumption, an indicator which makes up more than half of economic activity, retreated by 0.2%. This is due to households tightening their budget as there is a rise in costs of living. Business spending was also sluggish in the fourth quarter as it fell by 0.1%.

The Net Exports (i.e. Exports minus Imports), or External Demand contributed 0.2% to GDP. Exports have increased by 2.6% from the previous quarter.

Negative Interest Rates

To boost spending and investment, the Central Bank (i.e. Bank of Japan) introduced a negative interest rate in 2016. At present, the BoJ is trying to end negative interest rates by this year. Many economists’ market players and analysts believe that the BoJ may try to end the negative interest rate by April this year.

In simple, the BoJ wanted to start policy tightening despite the prevailing risks. However, there is a chance for an early exit from ultra-loose policy. Japan’s tight labour market and strong corporate spending plans may allow the BoJ to have an early exit from the ultra-loose policy.

The ultra-loose policy of Japan is one reason it fails to attract global investors. Negative interest rates make the Yen less attractive and have pushed down the value of currency.

My Perspective/ Conclusion

In the late 1960s, Japan’s journey as the second-largest economy has started. Now, it has moved or slipped to the fourth-largest economy in the world. Japan’s journey as the largest economy reflects a complex economic history. From various natural disasters to asset bubbles in the early 1990s and prolonged economic stagnation, Japan has witnessed all of them.

The IMF has projected that India will overtake Japan in 2026 and Germany in 2027. Japan is having more challenges, and it is really a tough time ahead. The ageing population is more concerned than any other thing, as the workforce is always required for any economy. The ultra-loose policy may end soon; Japan may raise interest and say it attracts global investors too, but how it is going to handle the prevailing condition of shortage of workforce—is a real challenge. Japan has overcome many hurdles many times. Let’s hope it can even overcome this crisis in a couple of decades.

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