The Japanese economy unexpectedly contracted in the fourth quarter of 2023, entering a technical recession due to persistent challenges such as sticky inflation and a weakened yen, impacting private spending.
This countered the positive effects of increased export demand, complicating the Bank of Japan's plans to initiate policy tightening this year in light of deteriorating growth, necessitating stimulus measures and maintaining loose monetary conditions.
Government data revealed a 0.1% quarter-on-quarter decline in Gross Domestic Product (GDP) for the three months ending December 31, falling short of the anticipated 0.2% rise but showing improvement from the 0.8% contraction in the previous quarter.
On a year-on-year basis, GDP contracted by 0.2% during the December quarter, marking two consecutive quarters of decline and placing the Japanese economy in a technical recession.
The fourth-quarter downturn was primarily driven by a sustained decrease in private consumption, which fell by 0.2% quarter-on-quarter, missing growth estimates of 0.1%.
The previous quarter's figure was also revised downward to a 0.3% decline. External demand, representing the net contribution to GDP from exports, grew by 0.2%, below expectations of 0.3%, and showed a mild recovery from the 0.1% contraction in the prior quarter.
The sluggish growth is attributed to continued weakness in China, a significant export destination grappling with economic challenges.
Japan's technical recession poses a challenge to the Bank of Japan's plans to phase out its ultra-dovish policy in the current year, as worsening growth is expected to limit the BOJ's ability to raise interest rates and implement tighter monetary conditions.
Although inflation has moved closer to the BOJ's 2% annual target range, it has remained above the target due to persistent price shocks from high import prices and a weakened yen.
Stagnant wage growth has also contributed to a decline in domestic spending, a crucial driver of the Japanese economy, offsetting the modest boost from export demand.
Business spending remained weak, with a 0.1% quarter-on-quarter decline in capital expenditure, falling short of the expected 0.3% rise but showing marginal improvement from the 0.6% drop in the previous quarter.
Inflation slowed more than anticipated during the quarter, with the GDP price index decreasing to 3.8% year-on-year, below expectations of 4% and the previous quarter's reading of 5.3%.
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