Why did Japan go into recession? – 02/19/2024 – Market
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Japan entered an unexpected recession after its economy contracted for the second consecutive quarter, losing its place as the third richest country in the world by GDP (Gross Domestic Product) to Germany.
In the last three months of 2023, Japan’s GDP fell by 0.4% compared to the same period in 2022. In the previous three months, the economy had already contracted by 3.3%.
The data was released on Thursday (15) by the Japanese government. The numbers surprised even economists, who predicted growth of more than 1% in the last quarter of the year.
Two consecutive quarters of economic contraction are considered the typical definition of a technical recession.
The IMF (International Monetary Fund) had already predicted, in October, the probability of Germany overtaking Japan as the third largest economy in the world in terms of values referenced to the US dollar.
The IMF only announces the change in classification after both countries publish the final versions of their economic data.
1. A weak yen
According to economist Neil Newman, the most recent data shows that Japan’s economy was valued at around US$4.2 trillion in 2023, while Germany’s was worth US$4.4 trillion.
One of the causes, according to the expert, was the devaluation of the Japanese currency, the yen, in relation to the US dollar.
Newman says, however, that if the yen recovers, Japan could return to the global economic podium.
At a press conference held in Tokyo this month, IMF Deputy Managing Director Gita Gopinath had already indicated that the devaluation of the Japanese currency, 9% against the US dollar last year, was relevant and could lead the country to lose position in the ranking.
On the other hand, this devaluation of the currency against the dollar contributed to helping to boost the share prices of some of the largest Japanese companies, by making exports of goods such as automobiles in foreign markets cheaper.
But the latest results could mean that the Japanese central bank’s expected interest rate hike is delayed.
In 2016, the Bank of Japan introduced negative interest rates to encourage consumption and investment. The consequence is a less attractive yen for global investors, which hurts the currency’s value.
2. Drop in demand
As with other major economies in the world, Japan is suffering from a rise in the cost of living and prices.
Yoshitaka Shindo, Japan’s economy minister, highlighted the need for strong wage growth to support consumption, which he described as “no momentum” due to the upward spiral.
In Japan, private consumption represents more than half of economic activity. The index fell 0.2%, while markets predicted growth of 0.1%.
The decline was attributed to rising costs of living and high temperatures, which discouraged families from eating out and buying winter clothing.
Capital spending, another key private sector indicator, fell 0.1%, versus forecasts for a 0.3% gain.
It is the third consecutive quarter that private consumption and capital expenditure have contracted, which also contributed to the cooling of the economy.
3. The aging of the population
In addition to these indicators, the Japanese economy continues to face the enormous challenge of an aging population.
In September 2023, Japan recorded that one in 10 people was over the age of 80 for the first time in history.
The same data showed that 29.1% —almost a third—of the 125 million Japanese people were aged 65 or over.
Japan has one of the lowest birth rates in the world and has long struggled to provide goods for its elderly population.
In January 2023, Japanese Prime Minister Fumio Kishida said the country was close to not being able to function as a society due to falling birth rates.
And although this is a problem that affects many countries around the world, it is particularly acute in Japan due to high life expectancy, which translates into more elderly people and less workforce to help support them.
Considering the total numbers for 2023, the Japanese economy grew 1.9%.
But the results of recent months and Germany’s surprise have raised alarm bells.
“Germany’s overtaking of Japan shows that it is imperative that we promote structural reforms and create a new phase of growth,” said Minister Shindo, according to the Kyodo News agency.
“We will implement all policy measures to support wage increases” to pave the way for sustainable demand-driven economic growth, he added.
While economists give a vote of confidence to Japan’s recovery if the yen strengthens, the IMF predicts that India could overtake Japan and Germany as early as 2026 or 2027, driven by its growing young population.
Recession also in the United Kingdom
The moment is also bad news for the United Kingdom.
The country entered recession after confirming an economic contraction for the second consecutive quarter.
British GDP contracted 0.3% between October and December, after falling 0.1% in the previous quarter, despite growing 0.1% in 2023 as a whole.
The United Kingdom and Japan are part of the G7, the group that represents several of the world’s most powerful economies, which also includes the United States, Germany, France, Italy, Canada and the European Union as de facto members.
Economic slowdowns have been common in recent months among these countries, with the exception of the United States, whose GDP exceeded forecasts and grew 3.3% in the last quarter of 2023.
At the moment, however, only the United Kingdom and Japan have entered recession.
This text was originally published here.
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