Japan, once the world’s second-largest economy 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.
The Japan economy is showing signs of improvement after avoiding a recession in early 2024. In this article, we will analyze the background and future prospects.
First, one of the factors that has avoided a recession is the government’s large-scale fiscal stimulus. The supplementary budget of approximately 100 trillion yen announced at the end of 2023 focused on medical care, welfare, employment, and livelihood support in order to alleviate the stagnation of economic activity caused by the spread of the new coronavirus.
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In addition, measures were implemented to reduce the burden on consumers, such as lowering the consumption tax rate and promoting the spread of cashless payments. These policies have had the effect of raising the purchasing power of households and firms and stimulating expectations for economic recovery.
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.
Next, let’s take a look at the current situation and challenges of economic improvement. Real GDP in the first quarter of 2024 increased by 0.5% q-o-q. This is the second consecutive quarter of positive growth, meaning that the economy has emerged from a recession.
The main contributing factors are private consumption and public investment. Consumer spending increased by 0.8%, mainly due to government benefits and tax cuts. Public investment increased by 1.2 percent, mainly due to infrastructure development and disaster prevention measures. On the other hand, exports fell by 0.2%.
This was due to the resurgence of coronavirus infections in major partner countries such as China and the United States, which led to a slump in external demand. Business fixed investment also declined by 0.3%. This is due to companies taking a cautious stance in the face of high uncertainty.
The economic outlook remains uncertain. Although vaccination against the new coronavirus is progressing, economic activity may be restricted again depending on the emergence of mutant strains and the infection situation overseas.
It is also uncertain whether the government’s fiscal stimulus will not only have a temporary effect but will also lead to sustainable growth. In addition, the risks of global inflationary pressures and rising interest rates cannot be ignored.
All of this suggests that the Japan economy has avoided a recession in early 2024, but it is not yet reassuring. The government and the Bank of Japan need to continue to implement appropriate economic policies. Companies and individuals are also required to contribute to economic revitalization by exploring new business opportunities and lifestyles.