Japan’s Economy Contracts, Falls to Fourth Place in Global Ranking
Japan faces unexpected downturn as recession deepens
Hong Kong/Tokyo
CNN
Introduction
Japan, once the world’s third-largest economy, has fallen into recession due to weak domestic consumption, losing its position to Germany. The unexpected contraction in Japan’s economy has implications both domestically and globally.
Economy Contracts, Contrary to Market Expectations
Japan’s gross domestic product (GDP) unexpectedly shrank at an annualized pace of 0.4% in the last quarter of 2023, based on data from the Cabinet Office. This decline follows a contraction of 3.3% in the previous quarter, meeting the criteria to be classified as a recession. The data revealed a contraction in Japan’s economy well below market forecasts, with economists anticipating a growth rate of 1.4% quarter-on-quarter for the October to December period.
Weak Domestic Demand and Rising Living Costs
Private consumption, a key driver of Japan’s economy, fell by an annualized 0.9% in the fourth quarter, marking a third consecutive quarter of decline. Japanese consumers struggled with higher prices for essential goods such as food, fuel, and other commodities. The weak yen, which significantly contributes to the higher cost of living, played a role in the decline. The nation depends heavily on imports for both energy and food.
Positive Contribution from External Demand
While domestic demand suffered, Japan’s economy found some relief in external demand, driven by export growth. Exports of goods and services experienced a significant boost, rising by an annualized 11% from the previous quarter. The weakened yen played a role in supporting the performance of export-oriented sectors. Notably, inbound consumption, including spending by tourists, witnessed a sharp increase during the period.
Impact of Natural Disaster
The struggling economy experienced an intensified setback due to a devastating earthquake that occurred in the Sea of Japan in January. Natural disasters, such as earthquakes, tend to disrupt economic activities as people curtail spending in the aftermath.
Outlook and Expectations for Recovery
Several economists express their belief that Japan’s recession is likely to soften in the coming months. Factors such as a stabilization in inflation, expected growth in wages, and improved business conditions indicated by surveys offer hope for recovery. The government may revise the figures for the fourth quarter, potentially upward. Analysts at Goldman Sachs project Japan’s economy to achieve 1% growth in the first quarter of 2024, with expectations of a moderate uptrend in inbound consumption. Furthermore, the bullish sentiment in Japan’s equities market and positive reforms in the corporate sector are seen as drivers for future growth.
Conclusion
While Japan’s economy faces challenging circumstances, the prospect of recovery and positive indicators offer some hope. Government policies, including potential revisions and economic reforms, are expected to play a crucial role in overcoming the recession and reviving Japan’s status as a leading global economy.
