Japan’s economy unexpectedly contracted due to weak domestic consumption, slipping into recession and falling behind Germany as the world’s third-largest economy. In the last quarter of 2023, the GDP shrank by an annualised 0.4%, following a 3.3% decrease in the previous quarter, which led to two consecutive quarters of contraction.
The decline was primarily due to weak domestic demand, with consumer spending across major categories turning negative. In contrast, only exports contributed positively. Consumer spending, vital for half of Japan’s economy, fell by 0.9% in the fourth quarter amidst rising costs for essential items. Japan has a heavy reliance on imports, which has made things worse. Their local currency, the Yen, has dropped 6.6% against the dollar since the start of the year.
And yet, none of the above is as surprising as the performance of the Japanese share market. Japan’s Nikkei 225 is on the way toward breaking the record high of the bubble boom reached on the last day of 1989. The speed of increase of the last leg up is powerful — the index has jumped 15% this year to handily outpace its peers among major developed markets. Euphoria is becoming evident among investors, though they could be forgiven for feeling anxiety too, considering how fast and far the unwind was from previous record peaks.
Source: Bloomberg
The weakness of the yen, which came close this month to surpassing the 151.72 per US dollar reached in November, was its lowest level since 1990. Indeed, while the initial stages of the 1980s rally came amid a strong rally in the yen, ever since the bubble burst yen gains have tended to undermine Japanese equities.
That could be part of the reason why the Bank of Japan is being cautious in its moves toward ending negative rates. A rapid surge in the currency could weigh on the economy and threaten to undermine its efforts to eliminate the deflationary mindset that has dominated Japanese consumers for decades.
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