Japan: Economy unexpectedly enters recession in Q4
The economy contracted 0.4% in seasonally adjusted annualized terms (SAAR) in the fourth quarter, a less pronounced drop than the third quarter’s 3.3% decrease but confounding market expectations of an expansion. As a result, the economy entered a technical recession, reducing the probability that the Bank of Japan will raise rates in March or April, as had been expected by the market. On an annual basis, economic growth slowed markedly to 1.0% in Q4, compared to the previous period’s 1.7% increase.
The downturn reflected a fall in domestic demand, suggesting that the recent uptick in inflation has hurt spending more than anticipated: Household spending fell 0.9% in the final quarter, only slightly less than the third quarter’s 1.4% contraction. Public consumption, meanwhile, contracted 0.5% in Q4 (Q3: +1.1% SAAR). Fixed investment also declined, albeit at a milder pace of 1.4% in Q4 from the 2.7% decrease logged in the previous quarter. On the external front, exports of goods and services increased 11.0% in the fourth quarter, which was well above the third quarter’s 3.8% expansion. Meanwhile, imports of goods and services growth picked up to 7.0% in Q4 (Q3: +4.0% SAAR), marking the strongest reading since Q3 2022.
Looking ahead, our panelists expect GDP to rebound in Q1 and accelerate further in Q2 and Q3, with domestic demand bolstered by lower inflation and still-easy monetary policy. That said, growth will remain tepid, restrained by weaker economic expansions among key trading partners.
On the outlook for Q1, Goldman Sachs analysts said:
“We set our initial real GDP tracking estimate for 2024Q1 at +1.0%: The first estimate of 2023Q4 real GDP growth highlighted the weakness of private-sector demand. For 2024Q1, although we expect consumption (+0.5%) and capex (+1.3%) to rebound, we lower our previous estimates for both (from +0.7% and +2.2%, respectively), and the recovery is unlikely to retrace the decline for three straight quarters. We expect inbound consumption to slow from the rapid rise in October-December but still expect a moderate uptrend.”
Economists at Nomura are less upbeat on the Q1 outlook:
“We think real GDP will show modest negative growth of -0.1% q-q annualized in 2024 Q1, following on from negative growth in 2023 Q3 and Q4. This would represent the first three straight quarters of declines in real GDP since 2012. We think the Japanese economy will struggle to avoid downward pressure from external factors in 2024 Q1, such as the Noto Peninsula earthquake and automobile production stoppages […]. We also think the disappearance of the boost from reductions in income tax and residents’ tax will result in negative real q-q GDP growth in 2024 Q4.”