Japan in recession, no longer world’s third-largest economy

investmentnews.com:

Japan’s economy unexpectedly slipped into recession after shrinking for a second quarter due to anemic domestic demand, prompting some central bank watchers to push back bets on when the nation’s negative interest rate policy will end.

Gross domestic product contracted at an annualized pace of 0.4% in the final three months of last year, following a revised 3.3% retreat in the previous quarter, the Cabinet Office reported Thursday.

The report showed both households and businesses cut spending for a third straight quarter as Japan’s economy slipped to fourth-largest in the world in dollar terms last year. Germany now has the world’s third-largest economy.

Only one of 34 surveyed economists had pointed to a contraction in the quarter, with the consensus at 1.1% growth. Overnight swaps after the result showed markets pricing in around a 63% chance of the Bank of Japan hiking by April, down from 73% a day earlier.

The weaker-than-expected result will complicate the BOJ’s case to conduct the first rate hike in Japan since 2007, a step most economists surveyed last month predicted the bank would take by April.

“This is a headwind for the BOJ,” said Takeshi Minami, economist at Norinchukin Research. “I think there was a feeling that the BOJ will end the negative rate in March or April, but a north wind is now blowing.”

The BOJ’s policy board has recently ramped up discussions surrounding an exit from the subzero rate policy and sought to assure markets that a rate hike wouldn’t signal a sharp shift in policy. 

Governor Kazuo Ueda told parliament last week that financial conditions in Japan will remain accommodative for the time being even after the end of the negative interest rate, echoing one of his deputies, Shinichi Uchida.