Japan, Asia's second-biggest economy, contracted an annualized 0.4% in the October to December quarter from the previous three months, following a revised 3.3% fall in the July to September period.
The preliminary figures released Thursday by the Cabinet Office for the final quarter of 2023 compare with a median forecast of an annualized 1.1% expansion among economists surveyed by QUICK.
During the fourth quarter, private consumption fell by an annualized 0.9%, and corporate investment dropped 0.3%. Exports rose 11%, while imports increased 7.0%.
"Service consumption has hit a lull, goods prices continue to increase, and because of the warm winter, clothing consumption was lackluster from October onward," said a government official.
The figures are generally a "negative surprise," said Yoshiki Shinke at the Dai-ichi Life Research Institute, pointing to weak consumption and capital investment. "There is possibly a growing trend in saving money due to inflation."
Shinke expects a further slide in the January to March period this year on falling exports, which could mean a third consecutive quarter of contraction.
"The [Bank of Japan] will likely lift negative interest rates in April," the economist said, but he remained skeptical on whether the economy is strong enough to "keep consecutively raising interest rates after that."
While Japan's economy grew 1.9% for the 2023 calendar year, it is now smaller than Germany's. Japan's nominal GDP figure for the year was $4.2106 trillion -- based on average exchange rates -- while Germany's economy was worth $4.4561 trillion, according to a government official.
Looking at long-term trends in local currency terms, Japan's growth is slower than that of Germany, reflecting the low productivity of the Japanese economy. In Germany, labor market reforms since the 2000s have improved productivity and helped raise the competitiveness of companies. The yen's rapid slide against the dollar is also a factor.