In a dramatic turn of events that has sent shockwaves through the global economy, Japan has unexpectedly entered a recession, relinquishing its position as the world’s third-largest economy to Germany. CNN reports that Japan’s Gross Domestic Product (GDP) shrank at an annualized pace of 0.4 percent in the final quarter of 2023, marking a consecutive period of negative growth that has officially pushed the country into a technical recession.

This economic downturn is attributed to weak domestic consumption, with private consumption, which makes up half of the economy, declining by 0.2 percent. Japanese consumers have been grappling with soaring prices for food, fuel, and other goods, exacerbated by Japan’s heavy reliance on imports for 94 percent of its energy needs and 63 percent of its food.

The unexpected recession has raised questions about when the Bank of Japan will begin to unwind its decade-long ultra-loose monetary policy. Despite many analysts’ expectations that the central bank would start phasing out its massive monetary stimulus this year, the recent weak data casts doubt on these forecasts. Rising wages, essential for underpining consumption and maintaining inflation around the central bank’s 2 percent target, have been described as “lacking momentum” by Economy Minister Yoshitaka Shindo.

The yen’s stability following the announcement, currently standing at 150.22 per dollar and near a three-month low, underscores the uncertainty surrounding Japan’s economic trajectory and the Bank of Japan’s policy direction. As Japan grapples with the challenges of reviving its economy and stimulating consumption amidst rising prices, the global community watches closely, pondering the implications of Japan’s recession on the broader economic landscape.

  Germany, Japan, recession