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Japan Sinks Into Recession, Surprising Many Economists

Japan Sinks Into Recession, Surprising Many Economists

Japan has unexpectedly fallen into a recession after its economy shrank for two quarters in a row, surprising many economists.

Source: BBC

Japan’s slipping into a recession was due to the country’s gross domestic product (GDP) contracted by a worse-than-expected 0.4% in the last three months of 2023, compared to a year earlier. It came after the economy shrank by 3.3% in the previous quarter. The figures from Japan’s Cabinet Office also indicate that the country has lost its position as the world’s third-largest economy to Germany.

Economists had expected the new data to show that Japan’s GDP grew by more than 1% in the fourth quarter of last year. The latest figures were the first reading of Japan’s economic growth for the period and could still be revised. Two quarters in a row of economic contraction are typically considered the definition of a technical recession.

In October, the International Monetary Fund (IMF) forecast that Germany was likely to overtake Japan as the world’s third-largest economy when measured in US dollars only to be shocked by the economic performance. The IMF will only declare a change in its rankings once both countries have published the final versions of their economic growth figures. It began publishing data comparing economies in 1980.

Economist Neil Newman told the BBC that the latest figures show that Japan’s economy was worth about $4.2tn (£3.3tn) in 2023, while Germany’s was $4.4tn. This was due to the weakness of the Japanese currency against the dollar and that if the yen recovers, the country could regain the number three spot, Mr Newman added.

At a press conference in Tokyo this month, the IMF’s deputy head, Gita Gopinath, also said an important reason for Japan potentially slipping in the rankings was the yen falling by about 9% against the US dollar last year. However, the weakness of the yen has helped to boost the share prices of some of Japan’s biggest companies as it makes the country’s exports, such as cars, cheaper in overseas markets.

This week, Tokyo’s main stock index, the Nikkei 225, crossed the 38,000 mark for the first time since 1990, when a collapse in property prices triggered an economic crisis. The Nikkei 225’s record high of 38,915.87 was set on 29 December 1989. The latest GDP data may also mean that the country’s central bank may further delay a much-anticipated decision to raise the cost of borrowing. The Bank of Japan introduced a negative interest rate in 2016 as it tried to boost spending and investment.

Negative rates make the yen less attractive to global investors, which has pushed down the currency’s value — making the recession a reputational blow for the country. 


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