Japan Loses Third-Largest Economy Title To Germany Amid Recession

Japan has paved a difficult road ahead as its economy contracted for the second consecutive quarter owing to weak domestic demand, pushing the country into a recession. This news has created uncertainty regarding the central bank's intentions to take a U-turn from its ultra-loose monetary policy later this year.

The country's unexpected economic downturn has resulted in the loss of its position as the world's third-largest economy, which is now taken over by Germany, as per a report by Reuters.

Government data revealed that the gross domestic product (GDP) witnessed a 0.4 per cent annualized decline in the October-December period following a 3.3 per cent contraction in the preceding quarter. This figure contrasts with the median market prediction of a 1.4 per cent rise.

Typically, two quarters of consecutive contraction define a technical recession. The poor figures might raise questions about the Bank of Japan's prediction that increasing wages will support demand and validate the gradual withdrawal of its extensive monetary stimulus measures.

The data indicated a 0.2 per cent decrease in private consumption, which accounts for over half of economic activity, contrasting with economists' expectations of a 0.1 per cent increase. Similarly, capital expenditure, declined by 0.1 per cent, contrary to forecasts of a 0.3 per cent rise.

External demand, on the other hand, added 0.2 percentage points to GDP, with exports increasing by 2.6 per cent compared to the previous quarter.

As per sources cited in the report, the Bank of Japan (BOJ) has been preparing to terminate negative interest rates by April and revamp other aspects of its ultra-loose monetary framework. However, any subsequent policy tightening is expected to proceed cautiously due to persistent risks.