At the close of 2023, Japan’s economy unexpectedly shrank for a second quarter, plunging the nation into a recession and complicating the Bank of Japan’s plans to reverse its negative interest rate policy.
Following a corrected 3.3% drop in the prior quarter, the gross domestic product contracted at an annualized pace of 0.4% in the last three months of 2018, according to a Cabinet Office report released on Thursday. Economists had been forecasting a 1.1% growth in GDP. The data revealed that firms and households both reduced their spending.
The information also showed that, in terms of dollars, Japan’s GDP shrank to the fourth largest in the world in 2017. Right now, Germany has the third-biggest economy in the world.
The BOJ’s argument for raising interest rates for the first time since 2007 will be made more difficult by the contraction. Most analysts polled last month anticipated the bank would act to reverse its negative interest rate policy by April.
In an effort to reassure markets that a rate hike wouldn’t signify a drastic change in policy, the BOJ’s policy board has recently intensified talks on ending the subzero rate policy.
Reiterating the position outlined by one of his deputies, Governor Kazuo Ueda noted to the parliament last week that the financial conditions in Japan will continue to remain accommodative for now, even after the end of the negative interest rates.
The figures released on Thursday, which showed Japan’s dependence on foreign demand, strengthened the argument for maintaining a lax policy. Growth was boosted by net exports by 0.2 percentage points. December saw a spike in exports, driven mostly by cars going to the US and equipment for making chips going to China. As a subset of service exports, inbound tourism also continued to expand, with December seeing a record number of tourists.
According to the data, domestic activity is still weak and expenditure is being restrained by inflation. Private consumption decreased by 0.2 percentage points as consumers tightened their budgets in response to increased living expenses. For the tenth consecutive month, household expenditures decreased in December compared to the same month last year, with pay increases falling short of inflation.
The previous quarter’s sluggish business spending also had a 0.1 percentage point negative impact on growth.
