Japan's economy has slipped into a recession as it unexpectedly shrank for two straight quarters on weak domestic demand, raising uncertainty about the central bank's plans to exit its ultra-easy policy sometime this year.

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The weak performance saw Japan lose its title as the world's third-largest economy, replaced by Germany.

Gross domestic product (GDP) fell an annualised 0.4 per cent in the October-December period after a 3.3 per cent slump in the previous quarter, government data showed on Thursday (February 15). The result compared with a median market forecast of a 1.4 per cent increase.

Two consecutive quarters of contraction are typically considered the definition of a recession.