Japan’s GDP Dips 0.4%, Enters Recession

• Japan’s GDP contracted by 0.4% in Q4 2023, marking two consecutive quarters of economic contraction.
• Despite the Recession, external demand and exports surged by an annualised 11%, buoyed by the weak yen.
• Japan’s unemployment rate dropped to 2.4% in December, and the Nikkei 225 index experienced significant growth in 2023.

In an unexpected turn of events, Japan’s economy contracted at an annualised pace of 0.4% in the last quarter of 2023, following a 3.3% contraction in the previous quarter. Contrary to economists’ expectations of 1.4% growth, the decline has been attributed to weak domestic consumption across all major categories, including consumer spending. In US dollar terms, this downturn has resulted in Japan ceding its position as the world’s third-largest economy to Germany.

Exports Rise 11% Amidst Recession

The heart of Japan’s economic woes lies in its domestic demand. Consumer spending, which makes up half of the economy, fell by an annualised 0.9% in the fourth quarter. Japanese consumers have been grappling with rising costs for essentials like food and fuel, exacerbated by a weak yen. The currency’s depreciation has significantly increased the cost of living, considering Japan imports most of its base energy requirements and a significant portion of its food. Despite these challenges, external demand provided a silver lining, particularly in exports. Exports surged by an annualised 11% from the previous quarter, benefiting from the currency’s lower value and boosting inbound consumption, including tourism spending.

Economic Resilience: Unemployment at 2.4%, Nikkei Up 28%

Despite the recessionary backdrop, Japan’s economic indicators show signs of resilience. The unemployment rate fell to a low of 2.4% in December, and the benchmark Nikkei 225 index soared, reflecting positive market sentiment. The Bank of Japan’s Tankan survey also revealed the strongest business conditions since the fourth quarter of 2018. Furthermore, Japan’s equity market outperformed in Asia in 2023, with the Nikkei index rising by 28%. With Goldman Sachs predicting 1% GDP growth in the first quarter of 2024, there is cautious optimism for Japan’s economic recovery. Investors remain bullish, viewing the current downturn as a temporary setback rather than a long-term trend.