TOKYO, Feb 15 (Reuters) - Japan unexpectedly slipped into a recession at the end of last year, losing its title as the world's third-biggest economy to Germany and raising doubts about when the central bank would begin to exit its decade-long ultra-loose monetary policy.
Frail consumption and capital spending suggest a challenging economic outlook, with supply constraints potentially delaying the execution of spending plans. Some analysts are cautious about an early exit from negative rates.
The latest data showed Japan's gross domestic product (GDP) falling an annualized 0.4% in the October-December period after a 3.3% slump in the previous quarter, defying market forecasts for a 1.4% increase.
Two consecutive quarters of contraction are typically considered the definition of a technical recession.
While many analysts still expect the Bank of Japan to phase out its massive monetary stimulus this year, the weak data may cast doubt on its forecast that rising wages will underpin consumption and keep inflation durably around its 2% target.
Economy minister Yoshitaka Shindo stressed the need to achieve solid wage growth to underpin consumption, which he described as "lacking momentum" due to rising prices.
The yen was steady after the data and last stood at 150.22 per dollar, pinned near a three-month low hit earlier in the week.
Yields on Japanese government bonds fell after the data as some traders pushed back bets of an early BOJ policy shift. The benchmark 10-year yield slid 4 basis points to 0.715%. The Nikkei (.N225), stock average rallied to 34-year highs, with the data further underpinning recent reassurances from the BOJ that borrowing costs will stay low even after ending negative rates.
"Weak domestic demand makes it hard for the BOJ to pivot towards monetary tightening," said Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities. "The hurdle for ending negative rates in March has risen."
Japan's nominal GDP stood at $4.21 trillion in 2023, falling below $4.46 trillion for Germany to rank as the world's fourth largest economy, the data showed.