Can Japan Recover from Recession? What Will the BOJ Do?

Japan has lost its status as the world’s third-largest economy to Germany after slipping into a technical recession. The unexpected development comes as Tokyo’s stock market sits within a whisker of its 1989 peak. The fragility of the economy complicates the Bank of Japan’s decision on when it should raise interest rates for the first time since 2007, a widely expected move that could give the weak yen a lift.

The strongest inflation in decades is weighing on spending by households and businesses. Both consumers and companies trimmed outlays for three straight quarters as wages failed to keep up with prices. While stable inflation is a welcome development for the BOJ, the impact of persistent price increases on domestic consumption is outweighing growth in spending by inbound tourists and export gains.