Japan’s economy expanded for a third straight quarter as companies boosted investment and net exports improved, keeping the Bank of Japan on track for further gradual interest rate increases. The data gave the yen a boost.
Gross domestic product grew at an annualised pace of 2.8% in the three months through December from the prior period, the Cabinet Office reported Monday. That compared with a revised 1.7% clip in the previous period and beat the 1.1% consensus estimate.
Monday’s data show that Japan’s economy continues to grow steadily, largely in line with the central bank’s projections. The fourth-quarter expansion is likely to give central bank authorities confidence they can continue to unwind the BOJ’s ultra-easy policy settings with gradual rate hikes.
“Personal consumption has slowed down a lot and inflation is weighing on consumption because real wages struggle to pick up,” said Yuichi Kodama, economist at Meiji Yasuda Research Institute. “However, overall, the economy is growing, so the BOJ will probably continue to be on track and raise interest rates gradually.”
The GDP figures will be revised in March, about a week before the BOJ next meets to decide policy. Economists expect the BOJ to wait until the summer before raising interest rates again. The yen initially strengthened after the release of the figures to 151.91 per US dollar from 152.36 before paring gains.
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Private consumption and net exports were better than consensus, while business investment lagged estimates a tad.
GDP details:
- Private consumption rose 0.1% versus estimate of -0.3%
- Business spending gained 0.5%, versus estimate of +0.9%
- Net exports contributed 0.7 ppt vs estimate of +0.4 ppt
- Private inventories matched the estimate of -0.2 ppt
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Private spending eked out a gain even as consumers have grown frustrated with persistent inflation, which has tended to outpace wage gains. Prime Minister Shigeru Ishiba sought to address the issue with a package of price relief measures as part of an economic stimulus package.
“Private consumption maintained its growth even when there was downward pressure on public sentiment,” said Kazuki Fujimoto, economist at the Japan Research Institute. “This is an indication of the strength of domestic demand in the face of headwinds, which will likely continue for some time.”
More voter-friendly measures may come as Ishiba’s minority government is negotiating with smaller opposition parties lobbying for a higher income-tax allowance and free high school tuition to be included in the budget for the year starting in April.
Net exports contributed to growth as imports dropped in the quarter due in part to falling energy prices. Exports picked up moderately, helped by robust spending by inbound tourists, whose outlays are categorised as service exports.
Japan’s trade outlook is increasingly uncertain as US President Donald Trump threatens to impose tariffs on his trading partners. Tokyo is trying to discern the details of Trump’s reciprocal tariff measures while it also seeks to win an exclusion from the president’s fresh tariffs on steel and aluminum.
The strong fourth-quarter result allowed the economy to eke out 0.1% growth for the whole of 2024, defying market expectations of a contraction. Even so it was the weakest advance since the pandemic.
The weak yen has dimmed Japan’s standing in the global economy by reducing the value of its good and services in US dollar terms. Japan now ranks as the fourth-largest economy after the US, China and Germany. Economists expect India to overtake Japan within a few years.
The yen fell more than 10% versus the US dollar last year even as Japanese authorities intervened in the foreign exchange market multiple times to prop it up.
Chart: Bloomberg
