Japanese recession makes German economy world’s third-largest

Japan fell into an unexpected recession at the end of last year, losing its position as the world’s third largest economy. to germany And questions have been raised about when central banks will begin to exit a decade of ultra-easy policy.

Some analysts are warning of further economic slowdown this quarter, as China’s weak demand, sluggish consumption and production suspensions at Toyota Motor Corp. point to a difficult path to economic recovery.

Yoshiki Shinke, senior executive economist at Dai-ichi Life Economic Research Institute, said, “What is especially noticeable is the slump in consumption and capital investment, which are the pillars of domestic demand.”

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“The economy is without a major driver of growth and will lack momentum for some time.”

Japan’s gross domestic product (GDP) fell at an annualized rate of 0.4% in the October-December period, after falling 3.3% in the previous quarter, government data showed on Thursday, disrupting market expectations for a 1.4% rise.

Two consecutive quarters of recession are usually considered the definition of a technical recession.

Although many analysts still expect bank of japan Massive monetary stimulus is set to be phased out this year, but weak indicators could cast doubt on the outlook that rising wages will support consumption and sustainably keep inflation near the 2% target. be.

“Two consecutive declines in gross domestic product (GDP) and a third consecutive decline in domestic demand are bad, even if revisions may change the final numbers,” said Stefan Anrik, senior economist at Moody’s Analytics. It’s news.”

“This makes it difficult for the central bank to justify a rate hike, let alone a series of rate hikes.”

Economy, Trade and Industry Minister Yoshitaka Shindo said consumption was “lacking momentum” due to rising prices, and stressed the need to achieve solid wage growth to support consumption.

At a press conference after the data was released, the governor responded to a question about the impact on BOJ policy, saying, “The BOJ comprehensively considers various data, including consumption, and risks to the economy in guiding monetary policy.” We understand that.”

The yen has stabilized in response to the statistics, and last week was fixed at 150.22 yen to the dollar, near the three-month low hit earlier in the week.

The data led some traders to backtrack on the Bank of Japan’s early policy change, and yields on Japanese government bonds fell. The yield on the benchmark 10-year Treasury note fell 4 basis points to 0.715%. The Nikkei Stock Average rose to a 34-year high, with the data further supporting the Bank of Japan’s recent reassurances that borrowing costs will remain low even after negative interest rates end.

Naomi Muguruma, chief fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities, said, “Due to sluggish domestic demand, it will be difficult for the Bank of Japan to turn to monetary tightening.” “The hurdle for lifting negative interest rates in March has risen.”

According to the data, Japan’s nominal GDP in 2023 will be $4.21 trillion, lower than Germany’s $4.46 trillion, the world’s fourth largest economy.

Consumption and capital investment are weak

Personal consumption, which accounts for more than half of economic activity, fell by 0.2%, compared to market expectations for a 0.1% increase, as households refrained from eating out and purchasing winter clothing due to rising living costs and a warmer climate.

Capital investment, another key private sector growth driver, fell 0.1%, compared to expectations for a 0.3% increase.

Both consumption and capital investment contracted for the third consecutive quarter.

Large companies expect capital spending to rise by a sharp 13.5% in the year to March, according to a quarterly survey. But analysts say rising raw material prices and labor shortages are slowing down actual investment.

The latest machinery orders, considered a leading indicator of capital investment, showed a contraction in November, casting doubt on the Bank of Japan’s view that strong investment will support the economy.

As exports increased by 2.6% from the previous quarter, the contribution of external demand (exports minus imports) to GDP was 0.2 percentage points.

The Bank of Japan is laying the groundwork for ending negative interest rates by April and overhauling other parts of its ultra-easy financial framework, but further policy tightening will be slow as risks remain. There is a strong possibility that there will be no such thing, a person familiar with the matter told Reuters.

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The exit from accommodative policy comes at a time when the Federal Reserve has paused aggressive interest rate hikes and is widely expected to reduce borrowing costs this year.

of international monetary fund raised its global growth forecast in January due to brighter prospects for the United States and China, but warned of risks such as geopolitical tensions in the Middle East.

Bank of Japan officials have not given any clues about when negative interest rates will be lifted, but many market participants expect it to be lifted in March or April. According to a Reuters poll conducted in January, April was the top month among economists to cancel negative interest rate policy.

Some analysts say Japan’s tight labor market and solid corporate spending plans keep an early exit from ultra-easy policy likely.

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Marcel Thieliant, head of Asia-Pacific at Capital Economics, said: “The Bank of Japan maintains that consumer spending ‘continues to increase moderately,’ and remains optimistic at its March meeting. I think it will show.” He stuck to his prediction that the bank would end its negative interest rate policy in April.