Japan Loses its Place as the Third Largest Economy Owing to Recession

Japan unexpectedly fell into a recession at the end of last year, losing its position as the world's third-largest economy to Germany. This has raised doubts about when the central bank will start exiting its decade-long ultra-loose monetary policy. Analysts are warning that weak demand in China, sluggish consumption, and production halts at a unit of Toyota Motor Corp point towards a challenging path to an economic recovery.

 Senior executive economist at Dai-ichi Life Research Institute, Yoshiki Shinke, said, "What's particularly striking is the sluggishness in consumption and capital expenditure that are key pillars of domestic demand. The economy will continue to lack momentum for the time being with no key growth drivers." In the October-December period, Japan's gross domestic product (GDP) fell an annualized 0.4 percent after a 3.3 percent slump in the previous quarter, confounding market forecasts for a 1.4 percent increase.

Two consecutive quarters of contraction are typically considered a technical recession. Although many analysts expect the Bank of Japan to phase out its massive monetary stimulus this year, the weak data may cast doubt on its forecast that rising wages will underpin consumption and keep inflation durably around its 2 percent target.

Senior economist at Moody's Analytics, Stephan Angrick, said, "Two consecutive declines in GDP and three consecutive declines in domestic demand are bad news, even if revisions may change the final numbers at the margin. This makes it harder for the central bank to justify a rate hike, let alone a series of hikes." Economy minister Yoshitaka Shindo stressed the need to achieve solid wage growth to underpin consumption, which he described as "lacking momentum" due to rising prices.