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Investing.com — Japan's economy unexpectedly contracted in the fourth quarter of 2023, plunging into a technical recession as persistent inflation and a weak yen weighed on consumer spending, largely offsetting improvements in export demand.
This outlook now complicates the Bank of Japan's plans to begin tightening policy this year, given that deteriorating growth requires stimulus and monetary easing.
Sales fell 0.1% from the previous quarter in the three months to December 31, government figures showed on Thursday. Although it was weaker than the expected 0.2% rise, it was an improvement from the 0.8% decline seen in the previous quarter.
Compared to the same period last year, sales decreased by 0.2% in the December quarter. The Japanese economy has fallen into a technical recession due to two consecutive quarters of GDP contraction.
Third-quarter GDP figures were also significantly lowered on Thursday.
The weak fourth quarter numbers were primarily due to the continued decline in , which fell 0.2% quarter-over-quarter, below the expected 0.1% growth. The previous quarter's figure was also revised downward to a decrease of 0.3%.
The growth rate, which represents the net contribution of exports to GDP, was 0.2%, lower than the expected 0.3% and a modest recovery from the 0.1% contraction in the previous quarter.
Behind the slowdown in growth is the continued slump in China, the country's largest export destination, and the country is also suffering from sluggish economic growth.
Japan's technology recession poses a challenge to the Bank of Japan's plans to begin phasing out ultra-dovish policies this year. The deterioration in growth is likely to limit the extent to which the Bank of Japan can raise interest rates or tighten monetary policy.
Inflation has moved closer to the Bank of Japan's annual target range of 2%, but remains above that level amid continued price shocks caused by high import prices and a weak yen. Wage growth has also largely stagnated.
These two factors weighed heavily on domestic spending, a key driver of Japan's economy. Lower spending now appears to be offsetting the modest boost in export demand.
Corporate spending also remained weak, falling 0.1% sequentially in the quarter, contrary to expectations for a 0.3% increase. However, this number was a slight improvement from his 0.6% decline last quarter.
Inflation was slower than expected in the quarter, falling to 3.8% year-on-year, but lower than the 4% expected and the 5.3% measured last quarter.
