Japan unexpectedly entered a recession at the close of the previous year, losing its position as the world's third-largest economy to Germany. This has raised uncertainties about when the central bank might start moving away from its long-standing loose monetary policy.
Analysts are cautioning against a potential further contraction in the current quarter due to weak demand in China, sluggish consumption, and production disruptions at a unit of Toyota Motor Corp, posing challenges to economic recovery and policymaking.
Yoshiki Shinke, senior executive economist at Dai-ichi Life Research Institute, highlighted concerns about the sluggishness in consumption and capital expenditure, both crucial elements of domestic demand. He predicts that the economy will lack momentum, lacking key drivers for growth.
According to government data released on Thursday, Japan's gross domestic product (GDP) declined by an annualized 0.4% in the October-December period, contrary to market expectations for a 1.4% increase. Two consecutive quarters of contraction typically define a technical recession.
While some analysts still anticipate the Bank of Japan to phase out its extensive monetary stimulus this year, the weak data raises doubts about the central bank's forecast that rising wages will support consumption and maintain inflation around its 2% target.
Stephan Angrick, senior economist at Moody's Analytics, pointed out that two consecutive GDP declines and three consecutive drops in domestic demand are concerning, making it challenging for the central bank to justify a rate hike.
Economy minister Yoshitaka Shindo emphasized the importance of achieving solid wage growth to support consumption, which he noted is lacking momentum due to rising prices.
The yen remained steady after the data release, and yields on Japanese government bonds fell as some traders delayed bets on an early Bank of Japan policy shift.
Private consumption, which constitutes more than half of economic activity, fell 0.2%, contrary to market forecasts for a 0.1% gain. Capital expenditure, another significant driver of private-sector growth, fell 0.1%, compared to forecasts of a 0.3% gain. Both consumption and capital expenditure shrank for the third consecutive quarter.
External demand, driven by exports minus imports, contributed 0.2 percentage points to GDP, with exports rising 2.6% from the previous quarter.
Despite the Bank of Japan's preparations to end negative rates by April and modify other parts of its ultra-loose monetary framework, there are concerns about a slow policy tightening due to lingering risks. This comes at a time when the U.S. Federal Reserve is pausing after aggressive interest rate hikes, and the International Monetary Fund warns of global economic risks.
While many market players expect the Bank of Japan to abandon negative rates in either March or April, there is ongoing debate about the possibility of an early exit from ultra-loose policy given Japan's tight labor market and robust corporate spending plans.
Paraphrasing text from "Reuters" all rights reserved by the original author.
