TOKYO, Japan – Japan’s economy unexpectedly contracted due to weak domestic consumption, leading the country into a recession and causing it to lose its position as the world’s third largest economy to Germany. According to the Cabinet Office, gross domestic product (GDP) shrank at an annualized pace of 0.4% in the last three months of 2023, after having contracted by an annualized 3.3% in the previous quarter. This decline is well below market forecasts, as economists had expected GDP to grow by an annualized 1.4% quarter-on-quarter in the October to December months.
The data confirms that Japan’s economy was the world’s fourth largest behind Germany in US dollar terms last year. The overall decline in the economy was driven by weak domestic demand, particularly in consumer spending. Private consumption, which accounts for half of the economy, declined by an annualized 0.9% in the fourth quarter, marking a third straight quarter of falls. This decline is attributed to higher prices for food, fuel, and other goods, which has led to a decrease in consumer spending.
Furthermore, capital expenditures also dropped for a third consecutive quarter, down by 0.3%, and investment in housing by the private sector tumbled by 4%. Despite falling into a technical recession, Japan’s markets have remained buoyant, with the benchmark Nikkei 225 advancing 1.2% and closing above the 38,000 level for the first time since 1990. Some economists believe that the recession is likely to moderate in the coming months, with expectations for a rebound in the first quarter of 2024.
Despite the disappointing fourth-quarter result, analysts expect that private consumption will improve in the current quarter given a stabilization in inflation and expected growth in wages. In addition, strong corporate earnings and solid demand for IT are expected to lead to increases in facility investment. It is also possible for the government to revise the fourth quarter figures upward next month during a regular review.
Goldman Sachs anticipates Japan’s economy to notch 1% growth in the first quarter of 2024, with expectations for a moderate uptrend in inbound consumption and a rebound in capital expenditure during the same period. Japan’s equities market may have had an exceptional year in 2023, with the Nikkei index up 28%, but analysts are cautiously optimistic, expecting fourth quarter GDP to be revised upward in March and that the GDP figures are unlikely to prevent the Bank of Japan from ending its negative interest rates in April.