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Japan has unexpectedly entered into a period of economic decline known as recession.

Japan has unexpectedly entered into a period of economic decline known as recession.

Unexpectedly, Japan fell into a recession at the end of last year, causing it to lose its position as the world’s third largest economy to Germany. This has also led to uncertainty about when the central bank will start to move away from its long-standing policy of loose monetary measures.

Several experts are cautioning about a potential decline in the current quarter due to low demand in China, slow consumer spending, and production halts at a division of Toyota Motor Corp. These factors suggest a difficult road to economic recovery.

Yoshiki Shinke, senior executive economist at Dai-ichi Life Research Institute, noted the notable sluggishness in domestic demand’s key components of consumption and capital expenditure.

Currently, the economy lacks momentum and there are no significant factors driving growth.

According to government data released on Thursday, Japan’s gross domestic product (GDP) decreased by 0.4% on an annualized basis in the October-December period, following a 3.3% decline in the previous quarter. This was unexpected as market predictions had anticipated a 1.4% growth.

A technical recession is often defined as two consecutive quarters of economic decline.

Although a lot of analysts anticipate the Bank of Japan to gradually reduce its extensive monetary policy in 2020, the poor data could raise uncertainty regarding its prediction that increasing salaries will support spending and maintain inflation consistently at 2%.

According to Stephan Angrick, a senior economist at Moody’s Analytics, a decrease in GDP for two consecutive periods and a decrease in domestic demand for three consecutive periods is concerning, even though the final numbers may be adjusted slightly through revisions.

“It becomes more challenging for the central bank to justify increasing interest rates, especially multiple times.”

The economy minister, Yoshitaka Shindo, emphasized the importance of increasing wages in order to support consumer spending. He noted that consumption has been lacking momentum due to inflation.

During a press conference, the speaker stated that the BOJ takes into account a range of information, such as consumption and potential economic risks, when determining their monetary policy. They were responding to a question about how the recently released data would affect BOJ policy.

The Japanese yen (JPY) remained unchanged after the data was released and is currently at 150.22 against the US dollar. This is close to the three-month low it reached earlier this week.

The Nikkei N225 increased by 0.8%, recovering from its previous losses, potentially due to speculation that the BOJ will prolong its extensive easing measures beyond initial projections.

In the span of three months, the GDP decreased by 0.1%, which was lower than the expected growth of 0.3% and an improvement from the 0.8% decrease in the previous quarter.

Weak consumption and capital investment

Private consumption, which makes up more than half of economic activity, fell 0.2%, weaker than a market forecast for a 0.1% gain, as rising living costs and warm weather discouraged households from dining out and buying winter clothes.

Investment in fixed assets, which is a significant driver of private sector growth, decreased by 0.1%, falling short of the expected 0.3% increase. This was due to delays in construction projects caused by supply limitations.

According to the data, external demand, which is the difference between exports and imports, added 0.2 percentage points to GDP. This was due to a 2.6% increase in exports from the previous quarter.

According to sources from Reuters, the BOJ is preparing to stop negative interest rates and make changes to its loose monetary policies by April. However, due to remaining risks, the BOJ is expected to proceed cautiously with any further tightening of its policies.

Although BOJ officials have not provided any hints on the specific timing for the potential discontinuation of negative interest rates, it is widely believed among market participants that this move may occur in either March or April. According to a Reuters survey conducted in January, economists primarily selected April as the preferred month for the abandonment of the negative rate policy.

According to certain experts, the strong labor market and significant corporate investments in Japan could potentially lead to an early end of the ultra-loose monetary policy.

According to Marcel Thieliant, who heads Asia-Pacific at Capital Economics, although the second consecutive decline in Japan’s GDP in Q4 may indicate a recession, data from business surveys and the labor market paint a different picture. However, the economy is still expected to experience slow growth this year due to a negative household savings rate.

Thieliant stated that the Bank of Japan (BOJ) has been stating that private consumption has been gradually increasing. He predicts that the bank will maintain a positive outlook at its meeting in March and will follow through with his prediction that they will discontinue their policy of negative interest rates in April.