Japan's economy unexpectedly contracted for a second quarter at the end of 2023, slipping into recession, per Bloomberg.
Japan unexpectedly slipped into a recession as its economy shrank for a second consecutive quarter due to weak domestic demand, leading some observers to revise their expectations on when the nation's negative interest rate policy might end.
The Cabinet Office reported that Gross Domestic Product (GDP) contracted at an annualized rate of 0.4% in the final quarter of last year, following a revised 3.3% decline in the previous quarter.
Both households and businesses reduced spending for a third straight quarter, contributing to Japan's economy slipping to the fourth-largest in the world in dollar terms last year. Germany now holds the position as the world's third-largest economy.
Out of 34 surveyed economists, only one had predicted a contraction in the quarter, with the consensus forecast at 1.1% growth. Following the release of the GDP figures, overnight swaps indicated that markets were pricing in a 63% chance of the Bank of Japan (BOJ) hiking rates by April, down from 73% the day before.
The unexpected weakness in the economy will make it more challenging for the BOJ to justify its first rate hike since 2007, a move that most economists surveyed last month expected would happen by April.
"This is a setback for the BOJ," said Takeshi Minami, an economist at Norinchukin Research. "There was a sense that the BOJ would end the negative rate policy in March or April, but now there's a change in the wind."
The BOJ's policy board has recently intensified discussions about exiting the subzero rate policy and has tried to reassure markets that a rate hike would not indicate a significant shift in policy.
Governor Kazuo Ueda told parliament last week that financial conditions in Japan would remain accommodating even after the end of the negative interest rate policy, echoing comments made by his deputy, Shinichi Uchida.
Bloomberg Economics commented on the situation, saying, "The surprise contraction in fourth-quarter GDP puts Japan in a technical recession and casts strong doubt over whether the Bank of Japan will follow through on signals it sent in January pointing to a quick retreat from its current policy stance."
