Japan is no longer the third-largest economy in the world.
The Asian country has lost that position to Germany, after it contracted for the last six months of 2023 and entered a recession.
Official data shows that Japan's economy unexpectedly shrank due to weak domestic demand.
This has raised uncertainty about the central bank's plans to exit its ultra-easy monetary policy this year.
An ultra-easy monetary policy has been the hallmark of Japan's banking system for the last three decades, marked by negative interest rates.
Japan's gross domestic product or GDP fell 0.4 per cent in the October-December period, after a 3.3 per cent slump between July and September.
However, market analysts expected a 1.4 per cent increase in GDP.
Two consecutive quarters of contraction are typically considered the definition of a technical recession.
Private consumption, which makes up over half of Japan's economic activity, fell 0.2 per cent. Capital expenditure, another key private-sector growth engine, fell 0.1 per cent.
Nevertheless, external demand, which is exports minus imports, contributed 0.20 per cent to GDP as exports rose 2.6 per cent from the July-September quarter.
A weak yen in comparison to the US dollar has helped Japan expand its exports.
Moreover, there is a risk that the economy could continue to shrink in the January-March quarter this year.
The three big reasons for the downside risks: slowing global growth, weak domestic demand and the impact of the new year quake in western Japan.
The weak data cast a shadow on the Bank of Japan's rosy GDP forecast and its plans to phase out ultra-easy monetary policy.
A Reuters report states that Japan's central bank has been laying the groundwork to overhaul its ultra-easy monetary policy by April.
Sources, however, suggest that it is likely to go slow on any subsequent policy tightening as risks persist.
The latest data did not have a major impact on the stock market. In fact, the benchmark index, Nikkei, rose one per cent, reversing some of its losses made from the previous session.
The stock market possibly rose on expectations the central bank may continue with its easy money policy for some more time.