Japan’s economy falls into recession after shrinking for 2nd straight quarter

Japan’s economy slipped into a recession as it unexpectedly shrank for a second straight quarter on weak domestic demand, data showed on Thursday, raising uncertainty about the central bank’s plans to exit its ultra-easy policy sometime this year.

The surprisingly weak performance saw Japan lose its title as the world’s third-largest economy, replaced by Germany.

Gross domestic product (GDP) fell an annualised 0.4% in the October-December period after a 3.3% slump in the previous quarter, government data showed. It compared with a median market forecast of a 1.4% increase.

Two consecutive quarters of contraction are typically considered the definition of a technical recession.

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The weak data may cast doubt on the Bank of Japan’s forecast that rising wages will underpin consumption, and justify phasing out its massive monetary stimulus.

“There’s a risk the economy could shrink yet again in the January-March quarter due to slowing global growth, weak domestic demand and the impact of the New Year quake in western Japan,” said Takuji Aida, chief economist at Credit Agricole.

“The BOJ could be forced to sharply downgrade its rosy GDP forecasts” for 2023 and 2024, he added.

The yen was little changed following the release of the data and last stood at 150.42 per dollar, pinned near a three-month low hit earlier in the week.

The Nikkei .N225 rose 1%, reversing some of its losses made from the previous session, possibly on expectations the BOJ may continue with its massive easing programme for longer than expected.

On a quarterly basis, GDP slid 0.1% against median forecasts of a 0.3% gain.

Private consumption, which makes up more than half of economic activity, fell 0.2%, the data showed, against a 0.1% gain seen by economists.

Capital expenditure, another key private-sector growth engine, fell 0.1%, compared with forecasts of a 0.3% gain.

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External demand, or exports minus imports, contributed 0.2 percentage point to GDP as exports rose 2.6% from the previous quarter, the data showed.

The BOJ has been laying the groundwork to end negative rates by April and overhaul other parts of its ultra-loose monetary framework, but is likely to go slow on any subsequent policy tightening amid lingering risks, sources have told Reuters.

While BOJ officials have not offered clues on when exactly they could end negative rates, many market players expect such an action to happen either in March or April. A Reuters poll taken in January showed April as the top choice among economists for the negative rate policy to be abandoned.

Some analysts say Japan’s tight labour market and robust corporate spending plans are keeping alive the chance of an early exit from ultra-loose policy.

“While the second consecutive contraction in GDP in Q4 would suggest that Japan’s economy is now in recession, business surveys and the labour market tell a different story. Either way, growth is set to remain sluggish this year as the household savings rate has turned negative,” said Marcel Thieliant, head of Asia-Pacific at Capital Economics.

“The (BOJ) has been arguing that private consumption has ‘continued to increase moderately’ and we suspect that it will continue to strike an optimistic tone at its upcoming meeting in March,” Thieliant said, sticking to his projection the bank will end its negative interest rate policy in April.