Japan no longer World's third largest economy

By Rhod Mackenzie

Japan's GDP fell by 0.4% in Q4 of last year, contrary to the 1.4% growth forecasted by economists polled by Reuters. The data update reveals that the GDP of Japan decreased by 3.3% in annual terms in Q3 of 2023, indicating a technical recession on the Japanese Islands. In the third quarter, the Japanese economy was predicted to grow by only 0.3%.

CNBC believes that the main problem facing the Japanese economy is currently high inflation, which is putting strong pressure on domestic demand and consumption. Additionally, GDP decreased by 0.1% compared to July-September 2023, with a more significant decline of 0.8% in the third quarter compared to the second.

Although the GDP data is preliminary and subject to change, Bloomberg reports that Japan has lost its position as the world's third-largest economy to Germany when calculating GDP in dollar terms. The GDP data has also complicated the work of the country's main bank, the Bank of Japan (BoJ), whose management is now trying to address the issue of a low discount rate.

Marcel Tilyant of Capital Economics commented on the statistics in a note to clients, stating that whether Japan entered a recession or not is irrelevant. The number of vacancies decreased, and the unemployment rate dropped to 2.4% in December. Additionally, a Bank of Japan study found that business conditions in all sectors of the economy are the highest since the last quarter of 2018. In any case, economic growth this year will be weak due to the negative household savings rate.

Personal consumption in the fourth quarter of 2023 decreased by 0.2% quarterly, despite experts predicting growth of 0.1%. Inflation is gradually slowing down, but the so-called “core inflation”, which excludes food and energy prices, is still above the BoJ's target of 2%. Furthermore, the Bank of Japan has been unable to reduce its interest rate for a year and three months since the end of 2022. Consequently, the central bank of Japan is refraining from adjusting the discount rate, making Japan the only country in the world with a negative rate.
The Bank of Japan (BoJ) believes that weak domestic demand is the main driver of inflation in Japan. BoJ expects that rising wages will eventually enable the Japanese to increase consumption. Market analysts anticipate that the Japanese central bank will abandon the negative interest rate in April, when the traditional spring wage negotiations will confirm the trend of steady growth. However, the surprise GDP data suggests that BoJ analysts and economists may have misjudged the relationship between inflation and consumption. Despite the steady growth of wages in the country, inflation may continue to put pressure on domestic consumption. If this happens, Kazuo Ueda, the head of the main Japanese bank, will have to reconsider plans and postpone tightening monetary policy once again.