Japan entered a technical recession in H2 2023. The first estimate of Q4 GDP indicates a modest contraction of -0.1% q/q following a more significant downturn of -0.8% q/q in the previous quarter. More symbolically, Japan lost its ranking as the world's third largest economy (in nominal GDP) to Germany. Nevertheless, the strength of economic activity in H1 2023 had given the Japanese economy a significant growth carry-over, allowing the average annual growth rate to reach +1.9% for the year (compared to +0.9% in 2022).
Admittedly, the estimate for Q4 GDP will be subject to revision, but even if the final figure were to belie a technical recession, the detrimental weakness of domestic demand, linked to rising prices and interest rates, will remain a major issue. Private demand fell (-0.3% q/q) for the third consecutive quarter, through both the consumption and investment channels, and was the first negative contribution to growth. Conversely, the recovery in foreign trade absorbed part of the contraction in the last quarter, contributing to growth by +0.2 pp due to the improvement in exports (+2.6% q/q). This trend could continue in Q1 2024, given the figures for January (+11.9% y/y, +2.3 pp).
Economic activity surveys do not point to a robust recovery, while we expect growth of +0.2% q/q in Q1 2024. The Jibun Bank PMI survey showed a deterioration in the manufacturing component in February (47.2, -0.8 pp), a low not seen since July 2020. The Services PMI also weakened to 52.5 (-0.6 pp), bringing the composite result close to the 50 mark (50.3, -0.8 pp).
Core inflation (excluding unprocessed foods) continued its slowdown in January, standing at +2.0% y/y (-0.3 pp), notably due to lower imported inflation allowing energy inflation to fall further (-12.1% y/y, -0.4 pp). However, a rebound is likely in February due to a base effect linked to the launch of the electricity subsidy programme in February 2023.
Inflation-related developments and forecasts are bringing Japan closer to monetary normalisation. We anticipate an end to the negative interest rate policy at the Bank of Japan’s March meeting, with a key rate rising from -0.1% to +0.1%, before reaching +0.25% by the end of 2024.
Article completed on 26 February 2024
