Japan enters recession: Japan's economy unexpectedly contracted for a second consecutive quarter, slipping into recession due to weakened domestic demand, according to Thursday's data release. 

The downturn has raised doubts about the Bank of Japan's plans to exit its ultra-easy monetary policy sometime this year, as the country loses its status as the world's third-largest economy, now replaced by Germany.

Gross domestic product (GDP) for the October-December period fell by an annualized 0.4 per cent, following a 3.3 per cent decline in the previous quarter, contrasting sharply with the median market forecast of a 1.4 per cent increase. Two consecutive quarters of contraction meet the technical definition of a recession.

Analysts express concerns over the Bank of Japan's prediction that rising wages would support consumption and justify the scaling back of its extensive monetary stimulus. 

Takuji Aida, chief economist at Credit Agricole, highlights risks such as slowing global growth and weak domestic demand, suggesting a potential downgrade in the BOJ's GDP forecasts for 2023 and 2024.

The yen remained relatively stable following the release of the data, while the Nikkei rose by 1 per cent, potentially due to expectations that the Bank of Japan might prolong its massive easing program.

On a quarterly basis, GDP contracted by 0.1 per cent, compared to median forecasts of a 0.3 per cent gain. 

Private consumption, which constitutes over half of economic activity, declined by 0.2 per cent, while capital expenditure, another vital driver of private-sector growth, fell by 0.1 per cent.

Despite efforts by the Bank of Japan to end negative rates by April and overhaul its ultra-loose monetary framework, sources indicate a cautious approach to subsequent policy tightening, given lingering risks.

While the timing of the end of negative rates remains uncertain, economists and market observers anticipate potential action in March or April. 

However, some analysts point to Japan's tight labor market and robust corporate spending as factors that could prompt an early exit from ultra-loose policy measures.

Marcel Thieliant, head of Asia-Pacific at Capital Economics, emphasizes the contrast between GDP contraction and other economic indicators, suggesting continued sluggish growth this year. 

Thieliant maintains a projection that the Bank of Japan will end its negative interest rate policy in April, anticipating the central bank's optimistic tone regarding private consumption at its upcoming March meeting.

(With Reuters Inputs)