Japan’s GDP Exits Delayed Due to Germany’s Overshooting of Negative Interest Rates
Japan’s economy unexpectedly fell into recession after a second consecutive quarter of shrinking growth, causing the country to lose its status as the world‘s third largest economy. This downturn has raised concerns about when Japan’s negative interest rate policy will end.
According to a preliminary report released by the Japanese Cabinet Office, Japan’s real gross domestic product (GDP) is expected to grow by 1.9% year-on-year in 2023, with a nominal GDP growth rate reflecting rising prices of 5.7%. However, on an annualized basis, Japan’s gross domestic product shrank by 0.4% in the fourth quarter of last year, following a revised 3.3% contraction in the previous quarter.
The decline in GDP has led to a change in Japan’s global economic ranking, with Germany surpassing it to become the world‘s third largest economy. Furthermore, the International Monetary Fund has predicted that India’s economy will eventually overtake both Japan and Germany.
The recession was attributed to a slowdown in domestic demand, with private consumption falling and household spending dropping 2.5% year-on-year in December. Business spending was also stagnant, with economists expressing concern about the impact of rising prices and consumer purchasing power.
While net exports contributed to some economic growth, the Bank of Japan warned of downward pressure from a slower recovery in overseas economies. End-of-year data for Japan’s trade partners suggests that external demand may no longer be a reliable source of support for Japan’s economic growth in 2024.
The weaker-than-expected GDP results complicate the Bank of Japan’s case for raising interest rates, with overnight swap trading statistics showing a drop in market probability of a rate increase before April. The bank recently increased discussions around exiting the zero interest rate policy but is still trying to assure the market that raising interest rates will not mean a drastic shift in policy.
Overall, the unexpected downturn has led economists to revise their predictions about Japan’s recovery and the likelihood of an interest rate hike. With these changes, Japan’s exit from negative interest rates may be delayed, potentially affecting the global economy and market trends.