On Thursday, 15 February, four major Japanese data points came out: 1) The nation lost its spot as the third largest economy, slipping below Germany; 2) Japan’s nominal GDP outgrew China’s; 3) the Nikkei Stock Average closed at 38,157 points, the highest in 34-years; 4) Japan slipped into a technical recession. These data points highlight the growing paradox in the Japanese economy over the past two years. As many nations hiked interest rates, Japan held negative interest rates. As the Yen became unfavorable internationally, domestic Japanese tech stocks became a favorite new betting ground for international traders (including offshore Chinese traders, much to the ire of policymakers in China). As other nations commented on policy decisions, the Bank of Japan refused to comment on Yen injections in the economy. Understanding Japan’s economy remains as about as challenging in predicting where it will go in 2024, but each of today’s four datapoints offer subtle clues.

Slipping below Germany’s economy and recession

The leading cause of Japan’s sudden recession is rising inflation that has led to decreasing domestic consumption and spending. There are simply too few sectors of Japan’s economy convincing domestic consumers to move their personal Yen from saving accounts. Meanwhile, Japanese productivity in the business sector has declined, resulting in poor sentiment and increasing prices. The results for Japan could be catastrophic in 2024. Despite a record-high number of inbound tourists in December 2023 and a continued positive outlook for inbound tourism in 2024, the world’s now fourth-largest economy cannot survive on a service model.

Consequentially, Japan grew to a valuation of $4.2 Trillion in the 2023 calendar year, while Germany’s economy now stands at $4.4 Trillion. One reason is the Japanese Yen’s weakness against the U.S. dollar, resulting in the rate exchange devaluing the Japanese economy just that much more. However, this is also a compounding factor and one of the causes of the poor business activity within Japan.

Moving into March and April, the Bank of Japan – which has maintained negative interest rates since 2016 – is likely to increase interest rates for the first time since 2007. The unprecedented policy movement that the BoJ will likely enact in 2024 will have a sizeable impact across East Asia as Japan seeks to maintain a leading role in investment and technology.

Nikkei Stock Average Closes at 34-year high.

The 38,157 point, 34-year high for the Nikkei Stock Average on Thursday stood in paradox to the bleak domestic data. More paradoxically, the rally on the Nikkei index has ridden on the back of upbeat corporate earnings. A chunk of this data does arise from inflation and increasing prices. Thus, there is a strong possibility that the Nikkei is also inflated and will fall in line with expectations after the BoJ increases interest rates. However, there are also two active sectors of the economy: silicone chip technology and the export of heavy machinery to the U.S.

Although diplomatic allies, Japan and Taiwan might soon swing between competition and cooperation in AI and chips. Japan’s tech companies with solid chip components (Tokyo Electron, Advantest, Shin-Estsu Chemical) have driven the tech sector and have strong fundamentals to continue pushing the Nikkei. Meanwhile, heavy equipment and exports, specifically to the U.S., improved unexpectedly as the U.S. has not fallen into a recession. Although tedious data points are potentially inflated, this represents a substantial opportunity for the Japanese economy to pivot toward 2024.

The following calendar year will be very challenging for Japan, impacted by inflation, scandals at Toyota, and political scandals across local and national levels. However, pivots in the tech industry – including drone and space development – present an opportunity to create a sector that can led Japanese growth in 2024 and help the now-fourth-largest economy become, once again, the third-largest economy.

Overtaking China’s nominal GDP growth

Lastly, Japan’s economy for 2023 displayed a nominal growth of 5.7%, while China’s grew by 4.6%. This data might offer more about China’s economy than it does Japan. Regionally, however, it provides a win for Japan’s economy as it attempts to attract domestic investors to re-shore into Japan, and other foreign investors move back into the Japanese market. While this is one data marker among many, it offers a potential win for Japan. To maintain this trend in the next calendar year, Japan will have to outcompete China’s chip industry, which is forming robust domestic growth. Japan’s chip and tech industry beating China in regional competition is also important for its various allies, including the U.S. and Taiwan, who should look to Japan as a regional ally that can prove a better option for investors over China.

Chinese policymakers went in on manufacturing development in January as their ticket out of deflation and growth slowdown. This contrasts with the previous two years, which saw the People’s Bank of China reluctant to shift policy away from housing or insert stimulus. China’s policy shift arrived too late for 2023, although consumer spending rising domestically over the Lunar New Year might offer a small glimpse of recovery.

Japan, likewise reluctant to shift policy, might be in a similar plight this year. By the time the BoJ shifts policy in early spring, China’s policy should start showing results of recovery or continued stagnation. While Japan should not react towards China’s economic data wholeheartedly, allied nations such as the United States should seek methods to incentivise investment activity within Japan’s tech sector to help the Japanese economy find a soft landing in an environment that is shaped for a hard landing.