By Eryk Bagshaw
Falling household spending, rising prices and a shrinking population have tipped Japan’s economy into a recession, stripping the Asian giant of its position as the world’s third-largest economy.
The unexpected result, announced by the cabinet office on Thursday, shocked market analysts who forecasted annualised growth of 1.1 per cent in the final three months of last year.
Japan’s economy has entered a technical recession. Credit: Getty
Instead, the economy dropped by 0.4 per cent on top of a 3.3 per cent fall in the three months prior, pushing the country into a technical recession and piling further pressure on the deeply unpopular government of Prime Minister Fumio Kishida.
The result means Japan has fallen behind Germany, according to nominal gross domestic product figures measured by the International Monetary Fund.
Japan has held the third position since 2010 when China overtook its neighbour to become the second-largest economy. India, one of the world’s fastest developing economies, is expected to overtake Germany and Japan by 2027.
Japan rocketed through most of the 20th century but has spent the last two decades struggling to keep up as its economy grapples with the impact of an ageing population, low immigration and rising prices.
Since the end of the COVID-19 pandemic, shoppers have been reluctant to spend stubbornly low pay packets, driving down household consumption. Keio University’s Sayuri Shirai, a former Bank of Japan policy board member, said it was a vicious cycle.
“At this moment, Japanese real wages are dropping very sharply and household consumption is dropping,” she told CNBC on Thursday. “I think a lot of Japanese people – we all feel the economy is not strong at all. Consumers are really suffering.”
Kishida unveiled a 17 trillion yen ($174 billion) stimulus program in November to help low-income households hit by inflation with one-off tax cuts.
“The economy, the economy, the economy. I will focus my attention on the economy more than anything else,” the prime minister said. “Pay hikes are not outpacing inflation. This is the biggest challenge facing us.”
In his pitch to voters, Kishida said his country could not afford to miss the opportunity to transition from a “cold temperature economy”, based on cutting costs, to a “suitable temperature economy”, based on lifting investment.
“Japan’s economy has cut down on investment in people and wages, as well as even investment in the future through capital investment and research and development investment, resulting in stagnant consumption and investment,” he said.
But the measures have failed to generate much popular support for the leader who is also facing multiple scandals over donation funding and his Liberal Democratic Party’s links to a religious cult, the Unification Church.
The latest Nikkei-TV Tokyo survey in January had his cabinet’s approval rating at 27 per cent – just one percentage point above the record low of 26 per cent in December.
Analysts had pinned some hopes of the spending bouncing back in a post-COVID tourism surge, but other services are struggling to stay competitive. Japan’s digital innovation has also stalled. After becoming one of the world’s leading innovators in the 20th century, it is increasingly reliant on overseas digital providers.
The IMD World Digital Competitiveness Ranking found Japan’s position had declined from 23rd of 64 countries in 2019 to 32nd last year.
A Japan analyst at Oxford Economics, Shigeto Nagai, said another constraint was a shortage of highly skilled IT workers, who are essential to transforming businesses to become less labour-intensive.
“The serious shortage of IT workers in Japan is ongoing, resulting in a rising gap between ambitious software investment plans and actual execution,” he said.
Get a note directly from our foreign correspondents on what’s making headlines around the world. Sign up for the weekly What in the World newsletter here.