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Japan Stumbled into Technical Recession in H2 2023 on Weak Domestic Demand

Japan's economy unexpectedly fell into a technical recession after recording a contraction for the second consecutive quarter, primarily due to sluggish domestic demand. The Cabinet Office disclosed on Thursday that the Gross Domestic Product (GDP) decreased by 0.1% in the last quarter of the previous year, following a revised drop of 0.8% in the preceding quarter. This outcome fell significantly short of the consensus forecast, which anticipated a 1.1% increase in Q4.


The downturn was notably marked by a reduction in spending by both households and businesses. Personal spending, which constitutes slightly more than half of the GDP, along with real private sector capital expenditure (capex), have now seen a decline for three consecutive quarters. Meanwhile, net exports contributed a modest 0.2 percentage points to growth. December witnessed a boost in exports, propelled by sales of automobiles to the US and semiconductor manufacturing equipment to China. Furthermore, inbound tourism, classified as service exports, saw continued growth, with visitor numbers in December reaching an all-time high for the month.


This downturn resulted in Japan relinquishing its position as the world's third-largest economy to Germany, despite the latter also grappling with sluggish growth.


Our Take: This development is undoubtedly disappointing for the Bank of Japan (BoJ) in its efforts to exit the Negative Interest Rate Policy (NIRP). It appears that the optimal window to do so may have already passed. Part of the economic softness could be attributed to consumers postponing consumption in anticipation of wage negotiations and expecting a decrease in inflation. Overall, we believe this setback is unlikely to alter the BoJ's outlook immediately, but it certainly makes the decision more challenging.


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