Recession in Japan: No longer the 3rd largest economy

Hello Readers

Japan’s GDP decreased by 3.3% in Q2, followed by a 0.3% decrease in Q3 for the financial year 2023-2024. This has led to a recession in Japan.

Recession

The people of Japan are facing setbacks one after the other; COVID-19 has brought them both mental and physical health crises. Followed by a high level of inflation in 2022 and last year’s severe floods. Now the people of Japan have to face the recession. However, the inflation has reduced to 2.60% from 4.00% as of December 31, 2023. But this doesn’t carry a good sign because experts are estimating further reductions due to weak consumption. Less demand in China is blocking the path of economic recovery.

A senior executive economist, Yoshiki Shinke, working at Dai-ichi Life Research Institute, expressed his opinion: “What’s particularly striking is the sluggishness in consumption and capital expenditure, which are key pillars of domestic demand.” There are no indicators that give a positive signal for the growth of the economy. In quarter 2 of the financial year 2023-2024, the GDP contracted by 3.3%, and in quarter 3, the GDP contracted by 0.3% though there was an improvement in contraction, and analysts estimated a 1.4% increase in GDP in the last quarter of the financial year 2023-2024.

Things don’t look good, two successive reductions in the GDP rate mean technically that the economy is in recession. The data on the economy doesn’t indicate an increase in consumption followed by an increase in salaries, thus making it difficult to keep inflation around 2%. A senior economist, Stepan Angrick, at Moody’s analyst reacting to the current situation, said, “Two consecutive declines in GDP and three consecutive declines in domestic demand are bad news, even if revisions may change the final numbers at the margin,” “This makes it harder for the central bank to justify a rate hike, let alone a series of hikes.”

On the other hand, the economic minister of Japan, Yoshitaka Shindo, said, that importance should be placed on an increase in salaries, as this will be the foundation for an increase in consumption, which in turn will beat the recession. He also said, “Our understanding is that the BOJ looks comprehensively at various data, including consumption and risks to the economy in guiding monetary policy.”. With this statement, the minister indicated that the Bank of Japan is not looking at weak consumption, which in turn led to recession and which can be practically defeated by rising wages. The minister’s response came when asked about the BOJ policy.

Capital Expenditure(Capex)

Capital expenditure, which significantly contributed to the economy, fell by 0.1% instead of 0.3 per cent, as per the estimations of Experts. Because the supply constraints affected the construction sector. Also, private consumption, which has a share of 50% in the economic activity, was even reduced by 0.2% instead of a 0.1% increase as per the market estimation. The Exports rose 2.6% compared to the previous quarter which is a positive sign and helps to get the economy out of recession. Also, the (BOJ) has planned to end the negative rates by April for which the foundation has been laid, but there are several risks.

However, BOJ has not said when they would end the negative rates, a Reuters poll results which was taken in January showed that the economists prefer the month of April to end the negative rate policy. On the other hand, the labour market and high corporate spending plans are allowing the early exit from the current policy.

Though there is a plan to end negative rates by April, a few others have a different opinion. Marcel Thieliant, head of Asia-Pacific at Capital Economics said “While the second consecutive contraction in GDP in Q4 would suggest that Japan’s economy is now in recession, business surveys and the labour market tell a different story. Either way, growth is set to remain sluggish this year as the household savings rate has turned negative,” 

Moreover, “The (BOJ) has been arguing that private consumption has ‘continued to increase moderately’ and we suspect that it will continue to strike an optimistic tone at its upcoming meeting in March,” said Thieliant assuming the bank will keep a full stop to its negative rate policy by April.

Dear Readers,

If you wish to read our other blogs click here

If you wish to read a blog from another website click here

1. What is recession?

If the GDP of the country falls for two consecutive quarters in a financial year( eg: 2020-2021) then the country’s economy is said to be in recession

2. How much fall in GDP did Japan observe in two quarters?

In quarter two japan’s GDP was reduced by 3.3% followed by 0.3% in quarter 3

3. What is a quarter in a financial year?

The quarter is three months of the financial year it can be from October to December or January to march

4. what is the current inflation rate in Japan?

The current Inflation rate is 2.60% as of December 31, 2023

Leave a Reply

Scroll to Top