If the yen recovers, Japan could return to the global economic platform
Japan entered an unexpected recession after its economy contracted for the second quarter in a row, losing its position as the third richest country in the world in terms of GDP to Germany.
In the last three months of 2023, Japan's GDP fell by 0.4% compared to the same period in 2022. In the previous three months, the economy had already contracted by 3.3%.
The data was released on Thursday by the Japanese government. These numbers surprised even economists, who expected growth exceeding 1% in the last quarter of the year.
Two consecutive quarters of economic contraction are the typical definition of a technical recession.
Last October, the International Monetary Fund predicted the possibility of Germany overtaking Japan as the third largest economy in the world in terms of values linked to the US dollar.
The International Monetary Fund does not announce the change in classification until after both countries publish the final versions of their economic data.
1. Weak yen
A depreciation of the currency can boost the economy's exports, but it may also harm the purchasing power of domestic consumers.
According to economist Neil Newman, the latest data shows that the value of the Japanese economy reached about $4.2 trillion in 2023, while the value of the German economy reached $4.4 trillion.
One of the reasons, according to the expert, was the devaluation of the Japanese currency, the yen, against the US dollar.
However, Newman says that if the yen recovers, Japan could return to the global economic platform.
At a press conference in Tokyo this month, IMF Deputy Director-General Gita Gopinath did suggest that the Japanese currency's depreciation, by 9% against the US dollar last year, was relevant and could cause the country to lose its place in the rankings.
On the other hand, this decline in the value of the currency against the dollar helped boost the stock prices of some of the largest Japanese companies, by making exports of goods such as cars in foreign markets cheaper.
But the latest results may mean a postponement of the expected interest rate hike by the Japanese central bank.
In 2016, the Bank of Japan introduced negative interest rates to encourage consumption and investment. The result is that the yen becomes less attractive to global investors, which hurts the value of the currency.
2. Low demand
In 2023, Japan again, for the first time since the outbreak of the epidemic, recorded more than 20 million visitors.
As is the case with other major economies in the world, Japan suffers from high costs of living and prices.
Yoshitaka Shindo, Japan's Economy Minister, stressed the need for strong wage growth to support consumption, which he described as “no momentum” due to the upward trend.
In Japan, private consumption represents more than half of economic activity. The index fell by 0.2%, while markets expected growth of 0.1%.
This decrease is due to high costs of living and high temperatures, which discouraged families from eating out and buying winter clothes.
Capital spending, another leading indicator of the private sector, fell by 0.1%, versus expectations for a 0.3% increase.
This is the third consecutive quarter in which private consumption and capital spending contracted, which also contributed to the slowdown in the economy.
3. Population aging
In addition to these indicators, the Japanese economy continues to face the enormous challenge of an aging population.
In September 2023, Japan recorded that one in 10 people were over 80 years old for the first time in history.
The same data showed that 29.1% – nearly a third – of the total 125 million Japanese people are 65 years or older.
Japan has one of the lowest birth rates in the world and has long struggled to provide goods for its aging population.
In January 2023, Japanese Prime Minister Fumio Kishida said that the country was approaching being unable to function as a society due to low birth rates.
Although this is a problem that affects many countries around the world, it is particularly acute in Japan due to its high life expectancy, which translates into an increasing number of elderly people and a limited workforce to help support them.
According to the United Nations, Japan has the largest population of older people in the world
Looking at the overall figures for 2023, the Japanese economy grew by 1.9%.
But the results of recent months and Germany's surprise raised alarm bells.
“Germany's superiority over Japan shows that it is necessary to strengthen structural reforms and create a new phase of growth,” Minister Shindo said, according to Kyodo News.
“We will implement all policy measures to support wage increases” to pave the way for sustainable, demand-driven economic growth, he added.
While economists give confidence in Japan's recovery if the yen strengthens, the International Monetary Fund predicts that India could overtake Japan and Germany as early as 2026 or 2027, driven by its growing young population.
Recession also in the UK
This moment also represents bad news for the United Kingdom.
The country entered a recession after confirming the economic contraction for the second consecutive quarter.
British GDP contracted by 0.3% between October and December, after falling by 0.1% in the previous quarter, despite growing by 0.1% in 2023 as a whole.
The United Kingdom and Japan are part of the G7, the group that represents many of the world's most powerful economies, and which also includes the United States, Germany, France, Italy, Canada and the European Union as de facto members.
An economic slowdown has been common in recent months among these countries, with the exception of the United States, whose GDP exceeded expectations and grew by 3.3% in the last quarter of 2023.
But currently only the UK and Japan are in recession.
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