At the end of last year, Japan suddenly entered a recession, losing its position as the third-largest economy in the world to Germany and casting doubt on the timing of the central bank's decision to cease its ultra-loose monetary policy of the previous ten years.
Some analysts are predicting another recession in this quarter due to weak Chinese demand, slow spending, and manufacturing halts at a Toyota Motor Corp business. These factors all point to a difficult recovery path for the economy.
Yoshiki Shinke, the senior executive economist of Dai-ichi Life Research Institute, noted that the slowdown in capital spending and consumption, two important pillars of domestic demand, is particularly striking. As long as there are no significant drivers of growth, the economy will keep on lacking impetus.
Japan's GDP shrank by an annualized 0.4% in the October–December period following a 3.3% decline in the preceding quarter, according to official statistics released on Thursday. This resulted in a discrepancy with market expectations, which were for 1.4% growth.
A technical recession is generally defined as two quarters of contraction following one another.
The disappointing data may call into question the Bank of Japan's prediction that growing salaries will support consumption and sustainably contain inflation around its 2% target, even if many experts still expect the bank to phase down its enormous monetary stimulus this year.
According to Moody's Analytics senior economist Stephan Angrick, two straight decreases in GDP and three straight declines in domestic demand are alarming, even though adjustments might affect the final figures at the margin.
Because of this, the central bank finds it more difficult to justify a rate increase, much less a succession of increases.
Yoshitaka Shindo, the minister of economy, emphasized that strong wage growth is necessary to support consumption, which he said was lacking momentum as a result of rising costs.
Speaking at a press conference following the release of the data, he addressed the implications on BOJ policy by saying that the BOJ looks thoroughly across all data, such as consumption, and risks to the economy in directing monetary policy.
After the data was released, the yen remained stable and was last seen at 150.22 each dollar, close to a three-month low that was reached earlier this week.
The Nikkei gained 0.8%, recovering some of the losses from the previous session, presumably due to concerns that the BOJ would extend its huge easing program beyond what was initially anticipated.
In comparison to median estimates of a 0.3% gain and a 0.8% decrease in the prior quarter, the GDP contracted by 0.1% on a quarterly basis.
Weak consumption and capex
Over half of the economic activity is derived from private spending, which decreased by 0.2% despite a 0.1% increase predicted by the market. This was due to growing living expenses and mild weather discouraging households from dining out and purchasing winter clothing.
Due to supply delays, capital expenditure — another important driver of the private sector's growth — fell by 0.1% as opposed to estimates of a 0.3% gain.
As exports increased 2.6% over the previous quarter, external demand, that is, exports minus imports, contributed 0.2 percentage points to GDP.
The BOJ has been preparing to remove negative rates by April and revise other parts of its ultra-loose monetary framework. However, sources said that due to lingering risks, any future policy tightening is likely to be slow.
Although BOJ officials have not provided any indication as to when precisely they will stop negative rates, many market participants anticipate that this will occur in either March or April. April was the most popular month among experts to end the negative rate policy, according to a January survey.
The BOJ has been preparing to remove negative rates by April and revise other aspects of its ultra-loose monetary framework. However, sources added that due to persisting risks, any future policy tightening is likely to be gradual.
Although BOJ officials have not provided any indication as to when they would stop negative rates, many market participants anticipate that this will occur in either March or April. According to a January Reuters survey, experts' top preference for ending the negative rate policy was April.
According to some analysts, Japan's tight labor market and substantial company expenditure plans are preserving the possibility of an early withdrawal from the country's ultra-loose policy.