Germany rises to third-largest economy, as recession hits Japan

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Japan’s economy has been facing a challenging path to recovery, and recent data shows that the country has unexpectedly slipped into a recession, losing its title as the world’s third-biggest economy to Germany. This news has raised doubts about when the central bank will begin to exit its decade-long ultra-loose monetary policy.

Weak demand in China and sluggish consumption all point towards another contraction in the current quarter.

Japan’s gross domestic product (GDP) fell an annualized 0.4% in the October-December period after a 3.3% slump in the previous quarter, confounding market forecasts for a 1.4% increase. Two consecutive quarters of contraction are typically considered the definition of a technical recession. While many analysts still expect the Bank of Japan to phase out its massive monetary stimulus this year, the weak data may cast doubt on its forecast that rising wages will underpin consumption and keep inflation durably around its 2% target.

Economy minister Yoshitaka Shindo stressed the need to achieve solid wage growth to underpin consumption, which he described as “lacking momentum” due to rising prices. “Our understanding is that the BOJ looks comprehensively at various data, including consumption, and risks to the economy in guiding monetary policy,” he told a news conference after the data’s release, when asked about the impact on BOJ policy.

The yen was steady after the data and last stood at 150.22 per dollar, pinned near a three-month low hit earlier in the week. Yields on Japanese government bonds fell after the data as some traders pushed back bets of an early BOJ policy shift. The benchmark 10-year yield slid 4 basis points to 0.715%. The Nikkei stock average rallied to 34-year highs, with the data further underpinning recent reassurances from the BOJ that borrowing costs will stay low even after ending negative rates.

Japan’s nominal GDP stood at $4.21 trillion in 2023, falling below $4.46 trillion for Germany to rank as the world’s fourth-largest economy, the data showed. Private consumption, which makes up more than half of economic activity, fell 0.2%, versus market forecasts for a 0.1% gain, as rising living costs and warm weather discouraged households from dining out and buying winter clothes.

(Source: Reuters | CNBC | Associated Press | CNN)

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