Thu, February 15, 2024, Tokyo: Japan slips into a recession, losing its spot as the world’s third-largest economy to Germany.
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Japan’s economy, now slightly smaller than Germany’s, fell one notch to become the world’s fourth-largest economy. This surprising turn of events was revealed by official data released on Thursday, which highlighted Japan’s challenges with declining population, domestic consumption, and low birth rates.
Understanding How Japan Slips Into A Recession
Japan’s Economy Quarterly Contractions 2023
| Quarter | GDP Growth Rate |
|---|---|
| Q1 2023 | 1.5% |
| Q2 2023 | -1.8% |
| Q3 2023 | -3.3% |
| Q4 2023 | -0.4% |
The country’s GDP growth rate was 1.5% in the first quarter of 2023, followed by a contraction of 1.8% in the second quarter. The country’s economy shrank at an annual rate of 0.4% in the last quarter of 2023 (October to December), according to data by the Cabinet Office on GDP that was released on February 15, 2024.
Image Credit: Cabinet Office, Japan
Prior to this, the third quarter also saw a significant contraction of 3.3%, marking the second consecutive quarter of contraction. This decline signifies the country’s entry into a technical recession, a term used when an economy contract for two straight quarters.
Declining In GDP Than The Projected Growth
Another critical concern for Japan’s economy is the contraction of 0.1 percent quarter-on-quarter in the final three months of 2023, which missed market expectations of 0.2 percent growth. Even economists polled by Reuters had expected GDP to grow by 1.4% p.a. This data, combined with revised third-quarter growth numbers, indicates that Japan experienced a technical recession in the latter half of 2023.
Depending on currenceny conversation, Japan’s nominal GDP (Gross Domestic Product) stands at $4.2 trillion compared with $4.5 trillion for Germany in 2023. Back in 2010, Japan’s economy was the second largest until China overtook it.
Factors Leading to Recession
High inflation and weak domestic demand are some of the major factors contributing to this decline. Additionally, businesses in Japan are now investing heavily in faster-growing economies overseas instead of in the aging and shrinking home market. Stagnating wages have left households reluctant to spend more. This has led to reduced demand and a lack of employment opportunities.
Effects of Recession on Employment and Household Spending
Unemployment Rates
Japan’s recession has led to a rise in unemployment rates. This negative turn in the economy is affecting job opportunities, with millions of workers looking for work. The rise of Generative AI has also increased. As a result, you might find it difficult to secure or maintain a job in the short term.
Consumer Confidence Metrics in Japan
When Japan’s economy takes a hit, so does consumer confidence. As reported, the consumption expenditure has reduced by 2.5% in the last quarter of 2023. You may notice that people around you are more hesitant to spend and make large purchases. There is a rational explanation for this behavior:
- Inflation: With higher prices for goods and services, the purchasing power of people is diminishing.
- Uncertainty: Economic volatility in the country has led to concerns about job security, prompting you to save more and spend less.
- Reduced disposable income: With stagnant wages but an increasing price index, domestic consumption is cut down in the country.
Impact on The Global Economy
As Japan slips into a recession, the implications of this economic turn extend beyond its borders. One of the primary concerns is the supply chain disruption. Japan, being a major player in the manufacturing industry, sees its supply chains affected by the recession. This could directly affect the businesses relying on Japanese imports like tech and automobiles.
Another area that may see the repercussions of Japan’s recession is the currency market. The fluctuation in the market could impact investments in Forex or businesses dealing with Japanese currency.
The recession could influence global stock market performances, causing volatility. As a result, you should closely monitor your investments and make calculated decisions based on the evolving situation.
Future Economic Forecasts
Economists have expressed mixed views on Japan’s recession. A few economic analysts anticipate that Japan’s unexpected recession may be temporary and could see a turnaround in the coming months.
According to a report by Dai-ichi Life Research Institute, Japan’s real GDP growth rate is expected to be +1.7% year-on-year in fiscal year 2023 and +1.3% in fiscal year 2024.
Marcel Thieliant of Capital Economics expects GDP growth to slow from 1.7% in 2023 to 0.5% in 2024.
On the other hand, some economists have noted that Japan’s recovery is struggling and won’t gain momentum.
Toshihiro Nagahama, an economist at Dai-ichi Life Research Institute, commented on Japan’s recession and its comparison to Germany’s economy. Nagahama noted that, like Japan, Germany’s population has been declining, but it has nevertheless achieved steady economic growth.
“This is because, especially since the 2000s, the government authorities in Germany have been actively implementing policies to create an environment that makes it easier for businesses to invest and grow, ” the economist further added. He also highlighted that Japan has not made progress in increasing its growth potential, and the shift in rankings mainly resulted from the depreciation of the Japanese currency.
Nonetheless, Japan’s policymakers have been trying to keep the economic recovery going with fiscal stimuli, like a $1 trillion stimulus package that the Japanese government instituted in the spring of 2021.