Japan’s economy contracts for second straight quarter on weak demand

Japan’s economy has contracted for a second straight quarter, recording “broad-based” falls in domestic demand and public spending and adding to pressure on the Bank of Japan as it considers raising interest rates for the first time since 2007.

Weak private consumption helped push Japan’s gross domestic product to shrink by 0.4 per cent on an annualised basis in the fourth quarter, and by 0.1 per cent on a quarterly basis, according to preliminary data released by Japan’s Cabinet Office on Thursday.

The fall was at odds with economists’ estimates of a slight rise of between 0.2 and 0.3 per cent, and pushed some investors to revise bets on when the BoJ will begin to unwind its ultra-loose monetary policy, including the world’s last remaining negative interest rates.

Economist had been expecting the BoJ to raise rates at its April monetary policy meeting, if not in March.

“The latest GDP data, although it might be revised, complicates the monetary policy outlook. Two consecutive declines in GDP add to a string of disappointing data releases,” said Stefan Angrick, chief economist at Moody’s Analytics in Tokyo. “This makes it harder to justify a rate hike, not to mention a series of hikes.”

Angrick noted that a small increase in exports had helped offset a larger contraction, but said “the decline in GDP was broad-based”, with falls in private consumption, capital spending and government consumption.

The disappointing fourth quarter data also came as Japan’s third-quarter GDP was revised down to a 3.3 per cent contraction on an annualised basis.

“To add insult to injury, GDP for the third stanza was revised to a 0.8 per cent drop from a 0.7 per cent drop” on a quarterly basis, added Angrick. “With two consecutive declines in GDP, Japan is in a technical recession.”

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The yen was little changed after the data release on Thursday at ¥150.2 to the US dollar, while the Nikkei 225 index rose close to 1 per cent, staying just above 38,000 points and within touching distance of its December 1989 bubble-era high of 38,915.

The BoJ kept overnight interest rates at minus 0.1 per cent at its most recent policy meeting in January.

But officials at the Japanese central bank have been growing increasingly confident that the economy is robust enough to attempt an exit from its negative interest rates policy, thanks to momentum for wage growth and greater assurance of hitting its inflation target of 2 per cent.

However, economists said that the fourth-quarter GDP data would complicate that picture, particularly as indices for services and consumption activity remained subdued ahead of the “shunto” spring wage negotiations by the country’s largest companies. 

Private consumption fell 0.2 per cent in the fourth quarter, following a 0.3 decline in the previous quarter.

“The Bank of Japan will likely now become even more cautious about any policy change,” said Min Joo Kang, senior economist for South Korea and Japan at ING, predicting that an interest rate increase could be pushed back to June, or even the third quarter of 2024.

According to Rabobank analysts, futures trading on Thursday suggested the probability of an April rate increase falling to 63 per cent, from more than 70 per cent the day before.

Japan’s Cabinet Office data releases are closely watched by economists and investors but are volatile and prone to revision. A technical recession is defined as two consecutive quarters of contracting GDP.