Image Credit- Reuters
Japan has ceded its position as the world’s third-largest economy to Germany, as the nation unexpectedly slipped into recession. Formerly the second-largest economy globally, Japan reported two consecutive quarters of contraction on Thursday, with a 0.4% annualized decline in the fourth quarter following a revised 3.3% contraction in the third quarter. This decline sharply missed forecasts, which had anticipated a 1.4% growth in the fourth quarter according to a Reuters poll of economists.
A recession, defined as two consecutive quarters of economic contraction, has now beset Japan. On a quarter-on-quarter basis, Japan’s GDP contracted by 0.1%, contrasting with the anticipated 0.3% rise forecasted in the Reuters poll.
For the entirety of 2023, Japan’s nominal GDP expanded by 5.7% compared to the previous year, amounting to 591.48 trillion yen. This translates to approximately $4.2 trillion based on the average exchange rate in 2023. Meanwhile, Germany experienced a 6.3% growth in nominal GDP, reaching 4.12 trillion euros, or around $4.46 trillion based on last year’s average exchange rate. Nominal GDP measures the value of output in current dollars, without adjusting for inflation.
Following the release of the latest GDP figures, Japan’s benchmark Nikkei 225 index rose by 0.65% and briefly exceeded the 38,000 mark in the morning trading session. Investors interpreted the weak economic data as a signal that the Bank of Japan might postpone its departure from the country’s long-standing negative interest rate policy.
The yen maintained its position around the 150 mark against the dollar, trading at 150.2 as of 1:55 p.m. Tokyo time. Charu Chanana, Head of FX Strategy at Saxo Markets, commented that the bleak growth outlook exacerbates the challenge for the Bank of Japan to tighten its monetary policy.
In a previous analysis, Chanana noted that the GDP contraction in the third quarter “undermines confidence regarding whether inflation is genuinely driven by a virtuous cycle of increased real income and spending.”
The recent economic downturn in Japan underscores the challenges faced by its economy and policymaking authorities. With the nation slipping into recession, there’s heightened uncertainty about its path to recovery and the effectiveness of policy measures aimed at stimulating growth and combating deflationary pressures.
