Japan, a trade-dependent country, is facing stagnation due to an economic slowdown in China, Geoffrey Williams, an economist at Malaysia University of Science and Technology, said.

China, which is Japan’s largest trading partner, is still grappling with the consequences of the Covid-19 pandemic and its strict lockdown policy.

The economic stagnation in Japan has led to a weakening of consumer spending, Williams told FMT Business.

“As a result, businesses are becoming more conservative in capital spending as they are not so confident of future growth in sales,” he said.

Capital expenditure in Japan declined by 0.1% in the last quarter of 2023 compared with the third quarter. This was the third consecutive decline for the year.

Williams said this will cause a slowdown in the production line and that will lead to a drop in demand for Malaysian products.

“This is already a trend, particularly in the export of raw materials such as liquefied natural gas (LNG), electrical and electronic products and crude petroleum, all of which saw a decline last year,” he said.

Malaysian exports to Japan for the period from January to October last year amounted to RM129.86 billion, a 14.1% decline from the same period in 2022.

In October, the volume of trade between Malaysia and Japan saw a 19.5% year-on-year decline.

Official data released on Feb 15 shows that Japan has slipped behind Germany to become the world’s fourth largest economy.

The East Asian giant was second only to the US, the world’s largest economy, for decades before it slipped into third place behind China in 2010.

A technical recession is a condition where the GDP shrinks for two consecutive quarters.

For context, Malaysia could face a technical recession if its GDP shrinks further in Q1 2024 following the 2.1% contraction in Q4 2023.

While this may raise concerns, some experts have played down such anxiety.

Carmelo Ferlito, CEO of think tank Center for Market Education, said the concept of a technical recession, which focuses solely on a country’s GDP, does not reflect its true economic status.

“It cannot assess the depth of the economic issues,” he told FMT Business.

“It is always misleading to look for a single explanatory factor (such as the GDP) for the economic phenomenon, which in reality is diverse and complex.

“The current contraction is mainly due to the consequences of the Great Lockdown (of Covid-19), as we anticipated long ago (in 2021),” he said.

Ferlito said the “irresponsible” lockdowns forced governments to expand their money supply with expansive fiscal and monetary policies, which, in turn, led to inflation.

However, he said, moving forward, Japan’s economy hinges on its “re-adjustment process” of mitigating the inflation.

Lai Wei Sieng of Universiti Kebangsaan Malaysia said the Malaysia-Japan trade performance will not be affected since most goods exported to Japan are raw materials.

“Raw materials such as petroleum gas, integrated circuits and rubber apparel are integral components of many supply chains and industrial operations, making it a foundation for value-added processes that manufacture goods,” Lai told FMT Business.

Hence, even during economic downturns or periods of weak consumer spending, the demand for raw materials tends to remain stable, he said.