The latest government data unveiled on Thursday disclosed that Japan's gross domestic product (GDP) endured a concerning annualized decline of 0.4% during the October-December period, following a substantial 3.3% downturn in the previous quarter. This unexpected downturn defied market expectations, which had anticipated a 1.4% upturn.
This unforeseen recession has thrust Japan out of its status as the world's third-largest economy, with Germany now claiming the spot, thereby sparking uncertainties regarding the timeline for the central bank's departure from its long-standing ultra-loose monetary policy.
Notably, analysts are sounding the alarm about a potential contraction in the ongoing quarter. Factors such as feeble demand in China, lackluster consumption, and production disruptions at a unit of Toyota Motor Corp (7203.T) collectively signal a formidable path toward economic recovery.
Yoshiki Shinke, a senior executive economist at Dai-ichi Life Research Institute, remarked, "What's particularly striking is the sluggishness in consumption and capital expenditure that are key pillars of domestic demand," emphasizing that the economy currently lacks momentum and lacks key growth drivers.
The string of disappointing data poses challenges for the Bank of Japan (BOJ), which had been contemplating an exit strategy from its expansive monetary stimulus. Despite widespread anticipation for such measures this year, the underwhelming economic performance may impede the central bank's plans, especially its forecast of sustained consumption supported by rising wages, essential for maintaining inflation around the 2% target.
Stephan Angrick, a senior economist at Moody's Analytics, emphasized the gravity of the situation, stating, "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." He noted that these developments complicate the central bank's ability to justify rate hikes.
Addressing the pressing need for solid wage growth to buoy consumption, Economy Minister Yoshitaka Shindo stressed the significance of monitoring various economic indicators, including consumption, to guide monetary policy effectively.
In the financial markets, the yen exhibited stability post-data release, hovering near a three-month low against the dollar. Meanwhile, the Nikkei (.N225) index rebounded by 0.8%, possibly on expectations that the BOJ may prolong its expansive easing program.
Breaking down the GDP figures, private consumption, constituting over half of economic activity, faltered by 0.2%, driven by escalating living costs and unseasonably warm weather discouraging household spending. Additionally, capital expenditure, a critical driver of private-sector growth, dipped by 0.1% due to supply constraints impeding construction projects.
While the BOJ has been contemplating an end to negative rates by April, sources suggest a cautious approach to subsequent policy tightening amid lingering uncertainties. Although there's no definitive timeline, market consensus points to potential policy adjustments in March or April, with ongoing debates about the likelihood of an early exit from ultra-loose policy driven by Japan's tight labor market and robust corporate spending.
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