Japan has unexpectedly fallen into a recession after its economy shrank for two consecutive quarters, according to figures from the country’s Cabinet Office. The gross domestic product (GDP) contracted by a worse-than-expected 0.4% in the last quarter of 2023, following a 3.3% contraction in the previous quarter.
Economists had anticipated positive growth of over 1% in the fourth quarter of the year. The unexpected contraction means that Japan has lost its position as the world’s third-largest economy to Germany. The IMF had forecasted this change, and it will officially declare the rankings shift once both countries publish their final economic growth figures.
The weakness of the Japanese yen against the US dollar contributed to the shift in rankings, as Japan’s economy was worth approximately $4.2 trillion in 2023, compared to Germany’s $4.4 trillion. The possibility of regaining the third spot exists if the yen strengthens.
The unexpected recession may also impact the Bank of Japan’s decision to raise borrowing costs. The central bank introduced negative interest rates in 2016 to stimulate spending and investment. The current economic situation could lead to a further delay in the decision to raise interest rates.
Despite the economic challenges, the weakness of the yen has benefited Japan’s exports by making them more competitive in global markets. The Nikkei 225, Tokyo’s main stock index, recently crossed the 38,000 mark, reaching levels not seen since 1990.
The unexpected economic contraction raises concerns about Japan’s economic recovery and the potential impact on global markets. Analysts will closely monitor future economic data and policy decisions to assess the trajectory of Japan’s economy in the coming months.
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