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Germany Becomes Third-Biggest Economy As Japan Slips Into Recession

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New Delhi: Japan faced an unexpected recession at the end of last year, dropping from the world’s third-biggest economy to the fourth, behind Germany. This development has raised questions about when Japan’s central bank might start moving away from its long-standing loose monetary policy.

Analysts are expressing concerns about the possibility of another economic decline in the current quarter. Factors such as low demand from China, slow consumer spending, and production disruptions at a unit of Toyota are all contributing to the challenges on the road to economic recovery.

“What’s particularly striking is the sluggishness in consumption and capital expenditure that are key pillars of domestic demand,” said Yoshiki Shinke, senior executive economist at Dai-ichi Life Research Institute.

“The economy will continue to lack momentum for the time being with no key drivers of growth.”

Japan’s economy, as measured by its gross domestic product (GDP), unexpectedly shrank by 0.4% from October to December. This followed a 3.3% decline in the previous quarter, going against predictions of a 1.4% increase.

Experiencing a decline for two consecutive quarters is usually seen as a technical recession. Although some analysts anticipate the Bank of Japan to reduce its large-scale monetary support this year, the discouraging data raises questions about its prediction that increasing wages will support spending and maintain inflation at its 2% goal.

“Two consecutive declines in GDP and three consecutive declines in domestic demand are bad news, even if revisions may change the final numbers at the margin,” said Stephan Angrick, senior economist at Moody’s Analytics.

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

Economy minister Yoshitaka Shindo stressed the need to achieve solid wage growth to underpin consumption, which he described as “lacking momentum” due to rising prices.

“Our understanding is that the BOJ looks comprehensively at various data, including consumption, and risks to the economy in guiding monetary policy,” he told a news conference after the data’s release, when asked about the impact on BOJ policy.

The yen remained stable after the data release, hovering around 150.22 per dollar, close to a three-month low seen earlier in the week.

The Nikkei increased by 0.8%, recovering some losses from the previous session. This might be attributed to expectations that the Bank of Japan (BOJ) could extend its significant easing program for a longer period than initially thought.

Looking at quarterly figures, GDP showed a 0.1% decline, differing from the predicted 0.3% gain. This contrasts with the 0.8% contraction in the previous quarter. Notably, private consumption, accounting for over half of economic activity, dropped by 0.2%, below the market expectation of a 0.1% gain. Factors like increased living costs and warm weather deterred households from dining out and purchasing winter clothing.

Capital expenditure, a crucial driver of private-sector growth, decreased by 0.1%, falling short of the anticipated 0.3% increase. This was due to supply constraints causing delays in construction projects.

External demand, calculated as exports minus imports, added 0.2 percentage points to GDP. The data revealed a 2.6% increase in exports from the previous quarter.

The Bank of Japan (BOJ) has been preparing to conclude negative interest rates by April and make changes to its ultra-loose monetary framework. However, any subsequent policy tightening is expected to proceed cautiously due to lingering risks, according to sources.

Although Bank of Japan (BOJ) officials haven’t provided clear indications of when they might cease negative interest rates, many in the market anticipate this move in either March or April. A Reuters poll in January revealed that economists predominantly favored April as the most likely time for the abandonment of the negative rate policy.

Certain analysts suggest that Japan’s strong labor market and solid corporate spending intentions maintain the possibility of an early departure from the ultra-loose monetary policy.

“While the second consecutive contraction in GDP in Q4 would suggest that Japan’s economy is now in recession, business surveys and the labour market tell a different story. Either way, growth is set to remain sluggish this year as the household savings rate has turned negative,” said Marcel Thieliant, head of Asia-Pacific at Capital Economics.

“The (BOJ) has been arguing that private consumption has ‘continued to increase moderately’ and we suspect that it will continue to strike an optimistic tone at its upcoming meeting in March,” Thieliant said, sticking to his projection the bank will end its negative interest rate policy in April.

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