Why did Japan experience recession in early 2024?
Japan, once the world's second-largest economy, has slipped into recession and lost its spot as the third-largest economy to Germany. According to the latest data, Japan's economy shrank by 0.1% in the fourth quarter of 2023, following a 0.8% contraction in the previous quarter. This means that Japan has experienced two consecutive quarters of negative growth, which is the common definition of a technical recession.
What are the causes of Japan's recession?
There are several factors that have contributed to Japan's economic woes, such as:
- A weak yen: The Japanese currency has depreciated significantly against the US dollar in the past two years, due to the diverging monetary policies of the two countries. While the US Federal Reserve has been raising interest rates and tightening its balance sheet, the Bank of Japan has maintained its ultra-loose policy of negative interest rates and massive asset purchases. A weaker yen makes Japanese exports cheaper and more competitive in global markets, but it also reduces the value of overseas earnings and increases the cost of imports.
- An ageing and shrinking population: Japan has one of the lowest birth rates and highest life expectancies in the world, resulting in a rapidly ageing and declining population. This poses a serious challenge for Japan's economic growth, as it reduces the size and productivity of the labor force, increases the burden of social security and health care spending, and dampens domestic consumption and investment.
- A lack of structural reforms: Despite several attempts by successive governments to revitalize Japan's economy through fiscal stimulus and monetary easing, known as "Abenomics", Japan has failed to implement meaningful structural reforms that would address its long-standing issues of low productivity, high public debt, rigid labor market, and low innovation. Without these reforms, Japan's potential growth rate remains low and its economy remains vulnerable to external shocks.
- A global slowdown: Japan's economy is also affected by the slowdown in global demand, especially from its major trading partners such as China, the US, and Europe. The ongoing trade war between the US and China, the uncertainty over Brexit, and the geopolitical tensions in the Middle East have all weighed on global trade and business confidence. Japan's export-oriented economy relies heavily on external demand for its products and services, such as automobiles, electronics, machinery, and tourism.
What are the implications of Japan's recession?
Japan's recession has significant implications for its domestic and international outlook, such as:
- A delay in monetary policy normalization: The Bank of Japan has been pursuing an ultra-easy monetary policy since 2013, with a target of achieving 2% inflation. However, despite its aggressive measures, inflation has remained stubbornly low and far below its target. The recession will likely put further downward pressure on prices and consumer spending, making it harder for the central bank to reach its inflation goal. This means that the Bank of Japan will have to maintain its accommodative stance for longer, even as other major central banks are moving towards policy normalization.
- A risk of fiscal deterioration: Japan has one of the highest public debt levels in the world, at more than 200% of GDP. The government has been trying to reduce its fiscal deficit and debt through a gradual increase in consumption tax, which was raised from 8% to 10% in October 2023. However, the tax hike may have also contributed to the contraction in consumer spending and economic activity in the fourth quarter. The recession will likely reduce tax revenues and increase spending needs, making it harder for the government to achieve its fiscal consolidation targets.
- A loss of economic influence: Japan's fall from the third-largest to the fourth-largest economy in the world reflects its relative decline in economic power and influence. Japan faces increasing competition from emerging economies such as China and India, which have higher growth rates and larger populations. Japan also faces challenges from other advanced economies such as Germany and South Korea, which have stronger innovation and competitiveness. Japan needs to enhance its economic dynamism and resilience by boosting its productivity, diversifying its sources of growth, and strengthening its regional and global cooperation.