TOKYO - Japan’s economy unexpectedly slipped into recession after shrinking for a second quarter due to anaemic domestic demand, prompting some central bank watchers to push back bets on when the nation’s negative interest rate policy will end.
Gross domestic product shrank at an annualised pace of 0.4 per cent in the final three months of 2023, following a revised 3.3 per cent contraction in the previous quarter, the Cabinet Office reported on Feb 15.
The report showed both households and businesses cut spending for a third straight quarter as Japan’s economy slipped to fourth-largest in the world in US dollar terms in 2023. Germany now has the world’s third-largest economy.
Only one of 34 surveyed economists had pointed to a contraction in the quarter, with the consensus at 1.1 per cent growth.
The weaker-than-expected result will complicate the Bank of Japan’s (BOJ) case to conduct the first rate hike in Japan since 2007, a step most economists surveyed in January predicted the bank would take by April.
“This is a headwind for the BOJ,” said Norinchukin Research economist Takeshi Minami. “I think there was a feeling that the BOJ will end the negative rate in March or April, but a north wind is now blowing.”
The BOJ’s policy board has recently ramped up discussions surrounding an exit from the sub-zero rate policy and sought to assure markets that a rate hike would not signal a sharp shift in policy.
Governor Kazuo Ueda told Parliament last week that financial conditions in Japan will remain accommodative for the time being even after the end of the negative interest rate, echoing one of his deputies, Mr Shinichi Uchida.
The latest data underscored the case for keeping policy loose by reflecting Japan’s reliance on external demand as domestic demand softens amid persistent inflation.
Private consumption retreated by 0.2 per cent, as households contending with rising costs of living tightened their budgets. Household spending fell 2.5 per cent in December versus a year earlier, a 10th straight month of declines, as wage gains lagged inflation. Business spending was also sluggish in the last quarter, falling by 0.1 per cent.
“Sticky inflation is cutting into consumers’ purchasing power, leading into weak consumption,” Mr Minami said. “That’s mild stagflation.”
Itochu Research Institute chief economist Atsushi Takeda said the slide in consumption was jarring.
“I was shocked by these results,” Mr Takeda said. “The impact from the rise in prices was larger than expected.”
Mr Takeda said the possibility of a BOJ rate hike in March is now virtually eliminated, though he still expects a move in April.
The yen’s weakening back to levels not seen since November threatens to spur cost-push inflationary pressure in coming months. Japan’s currency was little changed at around 150.40 yen to the US dollar after Feb 15’s data.
Net exports contributed 0.2 percentage points to growth. Exports jumped in December, led by vehicles to the United States and chip manufacturing gear to China.
Inbound tourism, classified as service exports, also saw continued growth, with the number of visitors setting a record for the month in December.
Looking ahead, external demand may become a less dependable source of support for growth in 2024, as some of Japan’s key trading partners are expected to see growth decelerate.
In its latest quarterly outlook published in January, the BOJ said the economy “is expected to be under downward pressure stemming from a slowdown in the pace of recovery in overseas economies”. BLOOMBERG
