(Bloomberg) – Japan’s economy unexpectedly contracted in the second quarter of 2023, sliding into recession and clouding the Bank of Japan’s path to ending its negative interest rate policy.
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Gross domestic product (GDP) shrank at an annualized pace of 0.4% in the last three months of last year, following a revised 3.3% contraction in the previous quarter, the Cabinet Office said on Thursday. Economists had expected the economy to expand by 1.1%. The report showed that both households and businesses are cutting spending.
The data also confirmed that Japan's economy fell to fourth place in the world in dollar terms last year. Germany is currently the world's third largest economy.
A weaker-than-expected result would complicate the Bank of Japan's claim to raise interest rates for the first time in the country since 2007, although most economists surveyed last month expected the Bank of Japan to raise rates by April. .
The Bank of Japan's policy committee has recently stepped up discussions on moving away from zero interest rate policy, seeking to assure markets that the rate hikes do not signal a sudden change in policy.
Governor Kazuo Ueda said in Congress last week that Japan's financial situation would remain accommodative for the time being even after negative interest rates were lifted, and his deputy, Shinichi Uchida, expressed a similar view.
Thursday's figures reflected Japan's dependence on external demand and highlighted the need to keep policy accommodative. Net exports contributed 0.2 percentage points to the growth rate. Exports surged in December, led by automobiles to the United States and chip manufacturing equipment to China. Inbound tourism, classified as a service export, also continued to grow, with visitor numbers setting a monthly record in December.
The figures show that domestic activity remains weak as inflation weighs on spending. Personal consumption fell by 0.2 percentage points as households tightened their budgets due to rising living costs. Household spending in December fell 2.5% from the same month last year, the 10th consecutive month of decline, as wage increases lagged behind inflation.
Business spending also slumped last quarter, pushing down growth by 0.1 percentage points.
(add details from report)
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