Japan's economy has stalled, but the stock market has soared against the trend, and whether negative interest rates can end as expected
Every reporter: Li Menglin Every editor: Lan Suying
Image source: Photo by special reporter Hao Shuai
Data released on February 15 showed that Japan's GDP unexpectedly fell in the fourth quarter of 2023, entering a technical recession for the second consecutive quarter. For the whole of 2023, Japan's nominal GDP grew by 5.7%, but its economy is lower than that of Germany, losing its position as the world's third-largest economy.
Japan's rapid rise after World War II created an economic miracle, and from 1968 to 2009, Japan was the world's second-largest economy after the United States until it was overtaken by China in 2010. The fact that Germany's total GDP is surpassed again will undoubtedly have a certain psychological impact on Japanese society. Tetsuji Okazaki, a professor of economics at the University of Tokyo, believes that Japan's activity on the international stage may decline.
A technical recession, as well as three consecutive quarters of declines in domestic consumption and business investment, have put the Bank of Japan's plans to normalize monetary policy in a difficult way. In this regard, Oxford Economics' senior Japanese economist Yamaguchi Fan Dai told the "Daily Economic News" reporter that GDP is backward-looking data, and if the real income of the Japanese people improves, the Bank of Japan is still likely to end negative interest rates in April.
Japan is no longer the third in the world
On February 15, local time, the preliminary statistics released by the Japanese Cabinet Office showed that Japan's nominal gross domestic product (GDP) in 2023 will be 591.482 trillion yen (about 4,210.6 billion US dollars), lower than Germany's 4,456.1 billion US dollars, falling to the fourth place in the world, and being overtaken by Germany.
The results also show that Japan's nominal GDP will grow by 5.7% in 2023, and real GDP will grow by 1.9% year-on-year. Nominal GDP is the value of all goods and services produced in a year at current market prices, and is more susceptible to market price fluctuations than real GDP. Although Germany's GDP contracted by 0.3% in 2023, it still surpassed Japan as rising prices and the appreciation of the euro against the dollar pushed up Germany's GDP.
In 2023, the yen depreciated significantly against the dollar. This week, the yen once touched the level of 150.5~150.9 yen per dollar, which was the lowest level in about three months. In addition to the depreciation of the yen, Japan's declining and aging population, as well as the stagnation of productivity and competitiveness, are seen by economists as structural factors in its decline to the third-largest economy. "A few years ago, Japan prided itself on strong industries such as automobiles. But with the advent of the electric car era, this advantage has also been shaken. Looking ahead to the next few decades, Japan's outlook is bleak. Tetsuji Okazaki told the Associated Press.
In fact, the International Monetary Fund predicted in October 2023 that Japan would lose its third place in the world, and that by 2026, the Japanese economy would be overtaken by India.
Data released by the Cabinet Office also showed that Japan's real GDP fell by 0.1% quarter-on-quarter in the fourth quarter of 2023, and the converted adult rate fell by 0.4%. This data came as a surprise, with market information firm Nikkei Quick forecasting a median 1.0% y/y increase. Combined with a revised 3.3% decline in GDP in the third quarter of 2023, the Japanese economy has been experiencing negative growth for two consecutive quarters, meeting the criteria for a technical recession.
Yamaguchi Hirodai, a senior Japanese economist at Oxford Economics, told the "Daily Economic News" reporter that the main reason for the decline in Japan's economy is weak domestic demand, which contracted by 0.3 percentage points in the fourth quarter of last year, compared with a 0.2 percentage point increase in net exports. "The biggest laggard is consumption, which has been declining for three consecutive quarters, especially in the services sector (down 0.6% vs. up 0.3% in the previous quarter) for the first time since the first quarter of 2022, indicating that the pent-up demand (pandemic) has weakened. ”
Yamaguchi pointed out that in addition to consumption, corporate investment is also declining. Japan's equipment investment fell by 0.1% in the fourth quarter of 2023, also the third consecutive quarter of decline, mainly due to high raw material prices and severe labor shortages dragging down the implementation of corporate investment plans. In reality, however, Japanese companies are more willing to invest, with large companies expected to raise capital spending by 13.5% in the fiscal year ending in March.
"Overall, weak GDP data for the fourth quarter of 2023 supports our forecast for Japan's economic growth of 0.6% in 2024, which is below consensus. Yamaguchi said.
Expert: GDP reflects the past, and the end of negative interest rates in April can be expected
Weak economic data has challenged Japan's path to monetary policy normalization.
Previously, it was widely predicted that the Bank of Japan is likely to start withdrawing from its long-standing negative interest rate policy at its policy meeting in April. On the one hand, inflation has exceeded the Bank of Japan's 2% target for more than a year, which is one of the key factors weighing on domestic consumption, and the interest rate differential between Japan and the United States has also caused continued depreciation pressure on the yen. On the other hand, the weak Japanese economy still needs the stimulus of ultra-loose monetary policy. Kazuo Ueda, the governor of the Bank of Japan, who took office just last year, faces a severe test.
"In my judgment, the Bank of Japan will exit the negative interest rate policy in April. GDP data reflects the past, not the outlook. As real incomes recover and consumer confidence improves, I think the BOJ will stick to its judgment that 'the Japanese economy is likely to continue to recover modestly', so it is unlikely that GDP in the fourth quarter of last year will have a significant impact on their decision-making. Yamaguchi told the reporter of the "Daily Economic News".
Yamaguchi's analysis was also corroborated by news reports. Reuters reported on February 16 that people familiar with the matter revealed that GDP is only one of several data that the Bank of Japan is concerned about, and what matters is the overall trend and outlook of the economy, so the Bank of Japan will still end negative interest rates in the coming months. Whether the annual wage negotiation in the spring of 2024 will raise the level of wage income will be an important indicator. Due to the labor shortage, many businesses have signaled that they will raise wages significantly. The Bank of Japan hopes that the easing of rising wages and rising pressure on prices will create room for the normalization of monetary policy.
In stark contrast to the economic data is the red-hot Japanese stock market. On February 16, the Nikkei Stock Average on the Tokyo Stock Exchange continued to rise, closing at 38,487.24 points, with a difference of only 50 points from its all-time high of 38,915.87 set at the end of December 1989. Since the beginning of the year, the Nikkei Stock Average has risen 15%.
Image source: Google Finance
The Nihon Keizai Shimbun reported that the impetus for the rise of the Japanese stock market came from the overseas profitability of Japanese companies. On Feb. 15, the shares of Shin-Etsu Chemical and Fuji Electric both hit their highest levels since their IPOs, with overseas sales accounting for 80% and 30% respectively. The depreciation of the yen boosted the profits of overseas subsidiaries of Japanese companies, driving stock prices higher. In addition, with the boom in AI technology, Japanese semiconductor stocks are also sought after by investors.
Yamaguchi explained to reporters, "I don't think the economic data will worsen market confidence. Real GDP fell in the fourth quarter of 2023, but nominal GDP still grew, which had a greater impact on corporate earnings. In addition, the continued weakness of the yen, coupled with a positive cycle in the IT sector, means that corporate earnings will remain strong, especially for those operating globally. The depreciation of the yen also means that the number of inbound tourists and spending will remain strong. ”