Japan’s economy has unexpectedly contracted, pushing the country into a recession and ceding its position as the world’s third-largest economy to Germany. The contraction comes as a result of weak domestic consumption, according to data released by the Cabinet Office.

The Gross Domestic Product (GDP) of Japan shrank at an annualized pace of 0.4% in the final quarter of 2023, following a contraction in the previous quarter. This downturn marks the second consecutive quarter of economic decline, meeting the definition of a recession.

Private consumption, which constitutes half of Japan’s economy, saw a decline of 0.2%. This dip in consumer spending is attributed to the challenges faced by Japanese consumers in dealing with higher prices for essential goods like food and fuel.

Neil Newman, a strategist at Japanmacro based in Tokyo, highlighted the significant impact of the weak yen on the cost of living in Japan. With the country heavily reliant on imports for energy and food—94% and 63% respectively—the depreciation of the yen has exacerbated the financial burden on Japanese consumers.

Newman noted that private consumption was notably weak, falling below market expectations of remaining flat. He also emphasized the likelihood of further economic strain in January following the Sea of Japan earthquake, as natural disasters typically lead to reduced consumer spending as people prioritize essential needs over discretionary purchases.

Japan’s slip into recession has not only economic implications domestically but also reshapes the global economic landscape. With Germany now surpassing Japan as the world’s third-largest economy in US dollar terms, the shift underscores the ongoing economic dynamics and challenges faced by major global players.

As Japan grapples with economic uncertainties, policymakers are expected to implement measures aimed at stimulating domestic consumption and bolstering economic resilience in the face of ongoing challenges.