Japan’s Top Forecaster Sees Economy Shrinking Again This Quarter, In BOJ Headache

Japan’s economy is likely to contract yet again this quarter after a surprise contraction at the end of 2023 showcased its stagnation, creating a headache for the Bank of Japan, according to a top economic forecaster.

Pedestrians cross an intersection in the Shibuya district of Tokyo, Japan, on Tuesday, Feb. 6, 2024. Japanese wage growth strengthened less than expected in December while still showing signs of sufficient underlying momentum to keep the Bank of Japan on track to end its negative rate regime in the coming months. Photographer: Kentaro Takahashi/Bloomberg

Japan’s economy is likely to contract yet again this quarter after a surprise contraction at the end of 2023 showcased its stagnation, creating a headache for the Bank of Japan, according to a top economic forecaster. 

“I expect three consecutive quarters of negative economic growth,” said Yoshiki Shinke, who has won forecasting awards 14 times from the Japan Center for Economic Research, the most among participants. “Japan’s economy is stagnating heavily in the absence of a leading engine.”

The economy slipped into a recession after data Thursday showed the economy shrank for a second quarter in the October-December period. The annualized quarterly contraction of -0.4% would have been even worse — possibly around -1.7% — had it not been for a one-off boost from industrial royalties, according to Shinke.   

If Shinke’s analysis proves accurate, the BOJ will remain stuck in an uncomfortable spot as it seeks the best timing to conduct its first interest rate increase since 2007. Some market participants pushed back their bets on the timeframe for the move after the gross domestic product data.

“I still think the BOJ will do it in April,” Shinke said. “They will probably point out brighter signs ahead as there seems to be positive momentum for wage growth this year.”

Toyota Motor Corp.’s subsidiary Daihatsu Motor Co. suspended production after a safety scandal erupted in December. Economists expect the closures to deal a heavy blow to Japan’s economic activities until the company returns to full output.  

“I don’t see the power of resilience against those headwinds in Japan’s economy now,” Shinke said. “Households are struggling with inflation and businesses are also pushing back investment.”

BOJ Governor Kazuo Ueda has stressed that the central bank aims to achieve a virtuous economic cycle in which wage gains feed into inflation. Shinke said with consumer spending dropping three consecutive quarters, it’s hard to say the positive cycle has been attained. Personal spending accounts for more than half of the economy. 

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