Japan loses title of world’s third-largest economy, enters recession 

Despite disappointing economic news from Japan, the Japanese yen gained against the U.S. dollar on Thursday. 

The nation not only unexpectedly entered a recession as per the latest data, but it also relinquished its position as the world’s third-largest economy — a title now held by Germany.  

Japan joined another major global economy in reporting a technical recession, with the UK having revealed a back-to-back quarterly GDP contraction. The UK’s gross domestic product fell 0.1% in Q3 2023 and 0.3% in Q4 2023, with the latter figure exceeding analysts’ expectations.  

Japan's GDP shrank by 0.4% in the final quarter of the previous year, marking a continuation of an economic downturn after a 3.3% decline in the preceding quarter. The contraction was well below the 1.4% growth that analysts had anticipated. 

The USD to JPY rate remained stronger than the three-month low of 150.88 reached on Tuesday, receiving a boost after Japan's leading currency officials cautioned against sudden fluctuations in the yen's value the day before. The yen also strengthened against the British pound, with the GBP to JPY pair trading at 188.31, indicating a 0.5% rise for the yen against sterling.  

At the time of writing on Thursday, USD/JPY traded close to the 149.90 mark, with the yen up over 0.4% against the greenback. 

Market reaction to Japan recession news unexpected, JPY rises vs. USD 

The currency market's reaction was somewhat unexpected, with the Japanese yen building on its gains from the previous day. This anomaly is likely due to the dire economic figures making it challenging for the Bank of Japan (BoJ) to deviate from its longstanding ultra-loose monetary policy. 

While the BoJ has hinted at tightening policy in recent months, the likelihood of such a shift during a recession seems to have lessened — a sentiment reflected in the market's response. 

The USD/JPY pair had already been on a downward trend from the recent surge triggered by higher-than-expected US inflation data. The market continues to anticipate rate cuts from the Federal Reserve — though not before its May meeting at the earliest. 

Attention is now shifting to how each central bank will respond to these latest economic developments. 

JPY forecast: Commerzbank says recession is “not a good outlook” for the yen 

The weak fourth-quarter GDP figures complicate the monetary policy outlook for the Bank of Japan, as per comments from analyst at Frankfurt-based Commerzbank. Following the GDP update on Thursday, they wrote:  

“Instead of slightly positive growth compared to the third quarter, the economy contracted again. This means that Japan has slipped into a technical recession in the second half of 2023, as the third quarter also saw negative growth, albeit on a much larger scale. On top of that, the Q3 numbers were revised down a bit more. 

As the global economy weakens, the Japanese economy seems to also suffer, except that the BoJ now has much less room to cut interest rates than other central banks. This is not a good outlook for the yen. 

And the Japanese figures underscore another fact: the US economy is out of competition at the moment, i.e. we are seeing a significant slowdown in economic growth in almost all other countries, with US growth being the main standout. That, in turn, is a much better outlook for the US dollar.” 

At the time of writing on Thursday, the U.S. dollar index (DXY), which measures the strength of the greenback against six major currencies,