Japan Slips from 3rd Largest Economy Status
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Japan Slips from 3rd Largest Economy Status
Japan’s economy faced an unexpected contraction due to a decline in domestic consumption, leading to a recession and a loss of its position as the world’s third-largest economy to Germany.
The Cabinet Office reported on Thursday that the Gross Domestic Product (GDP) experienced a contraction at an annualized rate of 0.4% in the final three months of 2023. This followed a previous quarter’s contraction of 3.3%. A recession is commonly defined as two consecutive quarters of economic contraction.
The decline was well below market forecasts. Economists polled by Reuters had expected GDP to grow by an annualized 1.4% quarter-on-quarter in the October to December months.
The data confirms that Japan’s economy was the world’s fourth largest behind Germany in US dollar terms last year.
Domestic demand was particularly weak. All major domestic demand categories, including consumer spending, were negative. Only external demand, which is captured by exports of goods and services, made a positive contribution.
Private consumption — which accounts for half of the economy — declined by an annualized 0.9% in the fourth quarter, as Japanese consumers battled higher prices for food, fuel and other goods. It marks a third straight quarter of falls.
Japan imports 94% of its base energy requirements and 63% of its food, so the weak yen significantly contributes to a higher cost of living, Neil Newman, a Tokyo-based strategist at Japanmacro, told CNN.
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The yen has experienced a 6.6% decline against the US dollar since the beginning of this year, marking it as one of the weakest performers among currencies used by the Group of 10 industrialized nations.
Speaking about the situation, an expert mentioned, “Private consumption was notably weak, and market expectations were for it to remain flat. Unfortunately, this is expected to worsen in January following the Sea of Japan earthquake. People tend to reduce spending during natural disasters.”
A seismic event shook the Noto Peninsula in the central prefecture of Ishikawa on January 1, resulting in building collapses, fires, and triggering tsunami alerts as far away as eastern Russia. Over 200 casualties and more than 1,000 injuries were reported.
In the fourth quarter, capital expenditures also saw a decline for the third consecutive quarter, dropping by 0.3%. The private sector’s investment in housing experienced a significant slump, falling by 4%.
On a positive note, external demand played a crucial role in supporting overall growth. Exports surged by an annualized 11% from the previous quarter, aided by the weakened yen. Notably, inbound consumption, including spending by tourists, saw a sharp increase.
Despite entering a technical recession, Japan’s markets have shown resilience, with the benchmark Nikkei 225 rising by 1.2% and closing above the 38,000 level for the first time since 1990.
These gains continued on Friday, with the Nikkei index rising by more than 1% in morning trade and hovering close to its historic high reached in December 1989.
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Several economists are suggesting that the ongoing recession may show signs of moderation in the coming months.
Min Joo Kang, a senior economist at ING Group, expressed optimism, stating, “Despite the disappointing [fourth-quarter] result, we expect [first quarter] 2024 GDP to rebound.” Kang highlighted potential improvements in private consumption, attributing it to a stabilization in inflation and expected wage growth. Additionally, she mentioned that robust corporate earnings and a steady demand for IT are expected to drive increases in facility investment on the investment side.
Analysts at Capital Economics provided a positive perspective, stating that business surveys and the labor market portray a more favorable picture of the business environment than headline numbers suggest. They highlighted the unemployment rate dropping to an eleven-month low of 2.4% in December. The Bank of Japan’s Tankan survey also indicated that business conditions across all industries and firm sizes were the strongest since the fourth quarter of 2018.
There is a possibility of the government revising the fourth-quarter figures upward next month during a regular review, as suggested by analysts.
Goldman Sachs anticipates Japan’s economy to achieve 1% growth in the first quarter of 2024. Despite expecting a slowdown in inbound consumption after the rapid rise in October-December, analysts at Goldman Sachs foresee a moderate uptrend. They added that capital expenditure could also rebound by 1.3% during the same period.
Analysts from Capital Economics expressed their expectation of an upward revision of fourth-quarter GDP in March. They believe the GDP figures are unlikely to prevent the Bank of Japan from ending its negative interest rates in April.
Investors in the country remain optimistic, with Japan’s equities market having an outstanding year in 2023. The Nikkei index rose by 28%, making it the best-performing market in Asia.
On the same day, Morgan Stanley reiterated its positive outlook on Japan’s equities, designating it as the “largest [overweight] recommendation in our coverage universe.”
The rally in Japan’s equities is attributed to ongoing corporate reforms and improving return on equities, while the weak yen has also played a role in boosting profits for Japanese exporters, according to analysts from Eastspring Investments.