The Japanese economy enters a recession and ranks fourth in the world
Japan's economy shrank late last year, defying expectations for modest growth and pushing the country into recession.
Japan's unexpectedly weak economy in the fourth quarter was the result of a slowdown in spending by businesses and consumers struggling with inflation at its highest level in four decades, a weak yen and rising food prices.
The end of the year also marked an expected moment: Japan's economy, now slightly smaller than Germany's, took a step back to become the world's fourth-largest economy.
On an annual basis, gross domestic product fell 0.4 percent from October to December, after a revised decline of 3.3 percent in the previous three-month period. Economists had forecast growth of about 1 percent for the fourth quarter.
The figures cloud the prospects for the Japanese economy. Corporate profits are at record highs, the stock market is rising, and unemployment rates are low. But consumer spending and business investment – two key drivers of the economy – are lagging behind.
Shinichiro Kobayashi, chief economist at Mitsubishi UFJ Research and Consulting, said the economy is “polarized” due to higher prices. When corporate profits rise, so do the prices of goods, but wages have not kept up and consumers are reluctant to spend, he said.
A big question will be whether Japanese workers can achieve a meaningful wage increase this year.
“The ball is in the court of the business community,” said Mr. Kobayashi.
The two consecutive quarters of negative growth mean the economy is technically in a recession, but the numbers are preliminary. A sufficiently large revision could negate the recession label.
The soft economic data also complicates an upcoming decision by the Bank of Japan on whether to go ahead with the country's first rate hike since 2007.
Japan's central bank has stubbornly maintained policies aimed at keeping interest rates low and boosting spending – a remnant of its long battle to combat deflation. Many economists had speculated that the central bank could finally change course as early as April if the economy appeared to be on stronger footing.
Marcel Thieliant, head of Asia Pacific at Capital Economics, wrote in a research note that he “doubts” the disappointing fourth-quarter figures will prevent the Bank of Japan from ending negative interest rates in April, even though economic growth will remain 'slow' for years. year.
The persistently weak Japanese yen remains a difficult problem for the central bank. The currency's decreased purchasing power means the cost of goods imported into Japan is rising, increasing the inflationary pressure felt by consumers. However, it tends to benefit the profit figures of many leading Japanese companies that sell goods abroad and bring foreign yen earnings back into the country.
By remaining steadfast in recent years even as the European Central Bank and Federal Reserve have raised interest rates, the Bank of Japan's policies have contributed to the yen's weakness. This has made it attractive for global investors to borrow yen at very low interest rates in Japan and then invest those funds in dollars or euros at much higher interest rates in the West.
Saisuke Sakai, senior economist at Mizuho Research & Technologies, said it appears likely that the domestic economy will contract again in the first three months of this year due to disruptions from January's major earthquake that hit western Japan – a region rich in is in production – has been shaken to its foundations.
This could damage consumer confidence even further.
“If we have three consecutive quarters of negative growth, people would think, 'Is Japan's economy really okay?'” Mr. Sakai said.
With the release of year-end gross domestic product figures, Japan also relinquished its place as the third largest economy after the United States and China, a position it has held since being eclipsed by China in 2010 . Germany now uses this distinction in terms of US dollars, the main currency used in global trade and finance.
In fact, the German economy is also sputtering. The decision to stop buying cheap Russian natural gas and oil after Russia's invasion of Ukraine has sent energy costs soaring, even as the country has switched to suppliers in the Middle East, the United States and elsewhere.
Japan could lose its hold on No. 4 in the coming years as its shrinking population struggles to keep pace with the growth of India, the world's most populous country.
Keith Bradsher reporting contributed.