Japanese economy enters recession and ranks 4th in world ranking

Japan’s economy contracted late last year, defying expectations for modest growth and pushing the country into a recession.

Japan’s unexpectedly weak economy in the fourth quarter was the result of slowing business and consumer spending as inflation hit a four-decade high, a weak yen and rising food prices food.

The end of the year also marked an expected moment: Japan’s economy, now slightly smaller than Germany’s, fell a notch to become the world’s fourth largest economy.

On an annualized basis, gross domestic product fell 0.4 percent between October and December, following a revised decline of 3.3 percent in the previous three months. Economists had forecast growth of around 1% for the fourth quarter.

These figures darken the outlook for the Japanese economy. Corporate profits are at record levels, the stock market is emerging and unemployment rates are low. But consumer spending and business investment – ​​two key drivers of the economy – are lagging.

Shinichiro Kobayashi, chief economist at Mitsubishi UFJ Research and Consulting, said the economy was “polarized” due to rising prices. When corporate profits rise, prices of goods also rise, but wages have not kept up and consumers are reluctant to spend, he explained.

The big question will be whether Japanese workers can get a significant increase in their wages this year.

“The ball is in the corporate sector’s court,” Mr. Kobayashi said.

The two consecutive quarters of negative growth mean the economy is technically in recession, but the numbers are preliminary. A large enough upward revision could negate the recession label.

Weak economic data also complicates the Bank of Japan’s upcoming decision on whether to proceed with the country’s first interest rate increase since 2007.

Japan’s central bank has stubbornly maintained policies aimed at keeping interest rates low and boosting spending – a vestige of its long battle against deflation. Many economists had speculated that the central bank could ultimately change course as early as April if the economy appeared to be on firmer footing.

Marcel Thieliant, head of Asia Pacific at Capital Economics, wrote in a research note that he “doubts” the disappointing fourth-quarter numbers will prevent the Bank of Japan from ending negative interest rates in April , even if economic growth will remain “slow” this year. year.

A thorny problem for the central bank remains the persistent weakness of the Japanese yen. The decline in the purchasing power of the currency means that the cost of goods imported into Japan increases, adding to the inflationary pressure felt by consumers. However, it tends to improve the financial results of many large Japanese companies that sell goods overseas and bring those foreign revenues home in yen.

By remaining stable over the past two years, even as the European Central Bank and Federal Reserve rates increased, the Bank of Japan’s policies have worsened the yen’s weakness. This made it attractive for international 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 seemed likely that the national economy would contract again in the first three months of this year due to disruptions from January’s major earthquake that shook western Japan, a region rich in industry.

This could further damage consumer confidence.

“If we had three consecutive quarters of negative growth, people would ask, ‘Is the Japanese economy really doing well?’ » said Mr. Sakai.

With the release of year-end gross domestic product figures, Japan also ceded its place as the third largest economy behind the United States and China, a position it had held since China eclipsed it in 2010 . Germany now holds this distinction in terms of US dollars, which are the primary currency used in global trade and finance.

In fact, the German economy is also struggling. Germany’s decision to stop buying cheap Russian natural gas and oil after Russia’s invasion of Ukraine sent energy costs soaring, even as the country turned to suppliers from the Middle East, the United States and beyond.

Japan could in coming years lose its grip on No. 4 as its shrinking population struggles to keep up with the growth of India, the world’s most populous country.

Keith Bradsher reports contributed.