Germany becomes third largest economy as Japan slips into recession
Germany became the world’s third-largest economy as Japan slipped into recession late last year and lost its position. According to a Reuters report, this development has raised concerns about the deadline for the Bank of Japan to exit its decade-old extremely loose monetary policy.
Analysts are cautioning about the possibility of another contraction in the current quarter. Factors such as weak demand in China, sluggish consumption and a production halt at a Toyota Motor Corp unit are contributing to a challenging path towards economic recovery and policymaking.
Yoshiki Shinke, senior executive economist at Daiichi Life Research Institute, highlighted the slowdown in consumption and capital spending, which are fundamental pillars of domestic demand. He expressed concern that without key drivers of growth the economy will continue to lack momentum.
Government data released on Thursday showed Japan’s gross domestic product (GDP) contracted an annual 0.4 percent in the October-December period, following a 3.3 percent decline in the previous quarter. The figures were contrary to market forecasts, which had forecast growth of 1.4 percent.
Consecutive quarters of contraction meet the technical definition of a recession. While many analysts still expect the Bank of Japan to phase out its massive monetary stimulus this year, the weak data could cast doubt on its forecast that rising wages will support consumption and keep inflation below its 2. Will maintain the percentage around the target.
Stefan Angrich, senior economist at Moody’s Analytics, said the significance of the decline in GDP and the continued decline in domestic demand. He said these factors make it challenging for the central bank to justify raising rates, let alone a series of hikes.
Japan’s Economy Minister Yoshitaka Shindo stressed the need to achieve solid wage growth to boost consumption, which he said was lacking momentum due to rising prices. He noted that the Bank of Japan considers a variety of data, including consumption and risks to the economy, when guiding monetary policy.
After the data release, the yen remained steady, at 150.22 per dollar. Yields on Japanese government bonds declined as some traders adjusted their expectations for an early change in Bank of Japan policy. The benchmark 10-year yield fell 4 basis points to 0.715 percent. Meanwhile, the Nikkei stock average hit a 34-year high after data reinforced the Bank of Japan’s recent reassurance about low borrowing costs even after eliminating negative rates.
Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities, commented on the difficulty the Bank of Japan faces in moving toward monetary tightening due to weak domestic demand. The hurdle to eliminating negative rates has increased in March, he said.
As for economic indicators, private consumption, which accounts for more than half of economic activity, fell 0.2 percent, contrary to market expectations of a 0.1 percent gain. Capital spending, another important driver of private sector growth, declined 0.1 percent compared to forecasts for a 0.3 percent gain. Both consumption and capital expenditure have declined for the third consecutive quarter.
While large companies are expected to see a significant increase in capital expenditure for the financial year ending in March, actual investment may be delayed due to rising raw material costs and labor shortage. Recent machinery orders data, considered a key indicator of capital spending, showed a contraction in November, casting doubt on the Bank of Japan’s expectations of strong investment supporting the economy.
External demand, represented by exports minus imports, contributed 0.2 percentage points to GDP growth, while exports rose 2.6 percent from the previous quarter.