Japan's economy unexpectedly slipped into a recession in late 2022, losing its status as the world's third-largest economy to Germany. This has raised concerns about the timing of the central bank's exit from its ultra-loose monetary policy.
Weak demand in China, sluggish consumption, and production halts at Toyota have contributed to the economic downturn. Analysts warn of a potential second contraction in the current quarter, highlighting the lack of momentum in domestic demand, particularly in consumption and capital expenditure.
Japan's gross domestic product (GDP) declined by an annualized 0.4 percent in the October-December period, following a 3.3 percent slump in the previous quarter. This marked two consecutive quarters of contraction, meeting the technical definition of a recession.
The Bank of Japan (BOJ) has been considering phasing out its massive monetary stimulus, but the weak economic data may cast doubt on its forecast of rising wages supporting consumption and inflation. Economists believe the central bank may find it difficult to justify rate hikes in the near term.
Economy Minister Yoshitaka Shindo emphasized the need for solid wage growth to boost consumption, which has been impacted by rising prices. The BOJ is expected to consider various data, including consumption and economic risks, when making monetary policy decisions.
Despite the economic downturn, the Nikkei stock average rallied to 34-year highs, supported by the BOJ's assurances that borrowing costs will remain low even after ending negative rates. However, analysts believe the hurdle for ending negative rates in March has increased due to weak domestic demand.