Japan's economy unexpectedly fell into recession after contracting in the second quarter due to weak domestic demand, prompting some central bank watchers to postpone bets on when the country's negative interest rate policy will end.
The Cabinet Office reported that following the previous quarter's revision, 3After a 3% drop in the last three months of last year, GDP grew at 04% rate contraction.
Businesses cut spending for the third consecutive quarter as Japan's economy slipped to the world's fourth-largest in dollar terms last year, according to the report. Germany is now the world's third-largest economy. Only one of the 34 economists surveyed pointed to a contraction in the quarter, with a consensus of 11%。The overnight swap after the results showed that the market was pricing in a 63% chance of the Bank of Japan appreciating by April, down from 73% the day before. Having fallen into a technological recession, Japan has lost its position as the world's third-largest economy, Germany. The unexpected development took place at a time when Tokyo** was at one of its peaks in 1989. The fragility of the economy complicates the BOJ's decision on when to raise interest rates for the first time since 2007, a move that could send the weak yen up sharply.
1.Why is Japan in recession?
The strongest inflation in decades is impacting household and business spending. With wages not keeping up with spending power, consumers and companies alike cut spending for three consecutive quarters. While stable inflation is a welcome development for the BOJ, the impact of the persistence on domestic consumption outweighs the growth in inbound visitor spending and export growth.
2.How did Japan perform when it fell into recession? It seems paradoxical that Japan has performed so well when the Japanese economy has taken a hit. With the Nikkei 225 approaching the levels it last saw when it boomed in the 80s of the 20th century, the market seems to be more focused on the ocean of changes in Japan's inflation dynamics and the change in the mindset of board executives.
Changes in corporate governance, strong earnings results, and inflationary returns are among the factors driving investors into the Japanese market. At the same time, a weaker yen is a key driver of corporate profits and share prices of large exporters.
3.Will this affect the Bank of Japan's plans to abandon negative interest rates? The unexpected recession complicated the situation with Bank of Japan Governor Kazuo Ueda. While central bankers generally want to avoid raising borrowing costs when the economy contracts, Ueda appears to be more focused on long-term trends in inflation and wages than on quarterly economic growth figures. Most economists** the Bank of Japan will raise interest rates by April. The economic contraction may not be enough for the Bank of Japan to derail from that time frame. Ueda said that even if he eliminated the world's last negative interest rate, financial conditions would remain accommodative. A rate hike could still bring interest rates to zero.
4.What does Ueda need to look at to raise interest rates?
Ueda would like to see a positive cycle of wages and spending power. The Bank of Japan has long believed that higher wages are needed to bring stable inflation and economic growth. The governor may want to see the much-anticipated wage negotiations between companies and unions yield greater benefits than last year. Rengo, the country's largest trade union federation, announced the vote count for the first pay deal in mid-March and will repeatedly update its results ahead of the final vote count in July. Ueda has already said he doesn't need to wait for all the salary results. Japanese union leaders have been ramping up calls for pay rises to surpass last year's levels, and Prime Minister Fumio Kishida has called for pay rises to be higher than inflation, which has increased pressure on companies.
5.Will Japan regain its position as the third largest economy? This seems unlikely. Japan's dollar ranking in the world economy has slipped below Germany's, thanks in large part to a weak yen and its trajectory of aging and shrinking population. However, it is difficult for the German economy to provide a model of economic health. The International Monetary Organization believes that both economies will be overtaken by India in the next three years. While both Japan and Germany have far higher per capita income levels than India, they lack population growth and domestic market potential.