Japan's economy experiences an unforeseen recession due to low domestic demand.

• In the fourth quarter, the provisional GDP contracted 0.4% compared to the previous year, following a revised 3.3% decline in the July-September period. This was weaker than the median estimate of 1.4% growth, as predicted by economists in a Reuters poll.
• In the fourth quarter, Japan's GDP contracted 0.1% compared to the previous quarter, despite shrinking a revised 0.8% in the July-September quarter. This was weaker than anticipated growth of 0.3%.

Japan's economy entered a technical recession as it unexpectedly contracted again in the October-December period, according to provisional government data. High inflation reduced domestic demand and private consumption in the world's fourth-largest economy.

The latest GDP print poses challenges for Bank of Japan Governor Kazuo Ueda and Prime Minister Fumio Kishida's interest rate normalization and fiscal policy support, as Germany surpassed Japan as the third-largest economy in the world in dollar terms last year.

In the fourth quarter, the provisional gross domestic product contracted 0.4% compared to the same period a year ago, following a revised 3.3% decline in the July-September period. This was significantly below the median estimate of 1.4% growth in a Reuters poll among economists. The GDP deflator in the fourth quarter was 3.8% on an annualized basis.

In the fourth quarter, the Japanese economy contracted 0.1% compared to the previous quarter, despite shrinking a revised 0.8% in the third quarter compared to the second. This was weaker than anticipated growth of 0.3%.

Marcel Thieliant, the head of Asia-Pacific at Capital Economics, wrote in a client note that it is uncertain whether Japan is currently in a recession.

Despite a decrease in job vacancies, the unemployment rate reached an eleven-month low of 2.4% in December. Additionally, the Bank of Japan's Tankan survey revealed that business conditions were the strongest they've been since 2018 in Q4.

Thieliant stated that the household savings rate has turned negative, resulting in sluggish growth this year, regardless of the approach taken.

High inflation, weak domestic demand

In contrast to the median estimate for a 0.1% increase, private consumption decreased by 0.2% in the fourth quarter compared to the previous quarter.

Despite the gradual slowdown of inflation, the "core core inflation" - inflation excluding food and energy prices - has surpassed the Bank of Japan's (BOJ) 2% target for 15 consecutive months. Despite this, the BOJ has persistently maintained the negative-rate regime, which is currently the only one in the world.

The weaker-than-expected GDP print on Thursday may challenge the BOJ's preference for inflation in Japan to be driven by domestic demand, which is more sustainable and stable. The bank believes that wage increments would translate into a more meaningful spiral, encouraging consumers to spend.

The BOJ is expected to end its negative rates regime at its April policy meeting after spring wage negotiations show a trend of significant wage increases.

Despite the prospect of higher wages, the weaker-than-expected growth print on Thursday suggests that high inflation is negatively impacting domestic consumption, which may strengthen the case for looser monetary policy for an extended period.