Following the news that the Japanese economy contracted for the second consecutive quarter in Q4 2023;

Ramnivas Mundada, Director of Companies and Economic Research at GlobalData, a leading data and analytics company, offers his view:

“The Japanese economy faces significant hurdles with recent data revealing a contraction for two consecutive quarters. The contraction, mirroring subdued demand and record-high inflation, has led Japan into a recession, coupled with the loss of its position as the world’s third-largest economy to Germany. GlobalData forecasts a deceleration in Japan’s economic growth to 0.76% in 2024 from 1.9% in 2023, primarily due to sluggish demand and rising living expenses.

“In Q4 2023, Japan’s economy shrank by 0.1% quarterly and 0.4% annually, following a contraction of 0.8% and 3.3%, respectively, in the previous quarter. Both private and government consumption decreased by 0.2% and 0.1% respectively. Public investment also fell by 0.7% from the previous quarter. However, net exports made a positive contribution, with exports growing by 2.6% compared to a 1.7% expansion in imports. The overall economic performance reflects challenges in stimulating domestic demand amidst a backdrop of global uncertainties.

“Japan faced its most significant inflation surge in four decades in 2023, as the core consumer price index rose by 3.1%. December 2023 witnessed a 2.3% rise in the core index from the preceding year while recording a slight dip from November’s 2.5%. This prolonged trend of high inflation, staying above the Bank of Japan’s 2% target, has persisted for 21 consecutive months. Although GlobalData projects the inflation rate of Japan to ease to 2.7% in 2024 from 3.2% in 2023, it is still expected to be higher than the central bank’s target.

“Regardless of challenges, on the positive side, the Japanese stock market continues its upward trend, fuelled by strong corporate earnings and manufacturing sector profits. The Nikkei 225 breached the 38,000-mark for the first time since 1990 on February 13, 2024, and outperformed Wall Street with a 13% gain in the first six weeks of 2024.

“Furthermore, the FY2024 Tax Reform proposals for Japan include measures to boost the economy and tackle social challenges. These encompass tax cuts for individuals effective from June 2024, incentives to encourage wage increases, support for domestic production of strategic goods, the creation of an “Innovation Box” for intellectual property rights, and efforts to bolster the startup ecosystem.

“Despite positive developments, risks persist due to subdued global economic sentiment, elevated inflation, the impact of China’s slowdown, and ongoing geopolitical tensions. However, the Japanese government’s reforms aim to revitalize the economy gradually, with GlobalData forecasting a slightly faster growth rate of 0.9% for the Japanese economy in 2025.”