Japan’s economy narrowly avoided slipping into a technical recession as the revised data for the fourth quarter of 2022 showed a slight expansion.
Although the upward revision was weaker than expected, it still highlighted the sluggish pace of Japan’s economic recovery.
Avoiding Recession: Japan’s Economy Shows Slight Expansion in Q4
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- Japan’s Q4 GDP increased to 0.4% annualized growth, avoiding a technical recession.
- Capital expenditure increase drove the upward revision, but consumption remains weak.
- Despite sluggish data, the Bank of Japan may ditch negative rates amid wage hike expectations.
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According to the Cabinet Office, Japan’s gross domestic product (GDP) grew at an annualized rate of 0.4% in the October-December quarter, a better outcome than the initial estimate of a 0.4% contraction.
However, this growth fell short of economists’ median forecast of a 1.1% increase.
GDP increased by 0.1% quarter-on-quarter, compared to the initial reading of a 0.1% drop and the median forecast of a 0.3% rise.
Daisuke Sakai, a senior economist at Mizuho Research and Technologies, acknowledged the upward revision but pointed out that “domestic demand, particularly in consumption, remains lackluster.”
The Driving Force: Capital Expenditure
Capital expenditure emerged as the anchor for the upward revision, increasing by 2.0% quarter-on-quarter.
This performance was better than the preliminary 0.1% decrease but still below the median market forecast of a 2.5% rise.
Household Consumption Remains Weak
Private consumption, which accounts for roughly 60% of Japan’s economy, fell by 0.3% in October-December, slightly worse than the initial estimate of a 0.2% drop.
According to a Cabinet Office official, seafood and household appliances contributed to the downward pressure in this category.
External Demand Contributes Modestly
External demand contributed 0.2 percentage points to real GDP, which was unchanged from the preliminary reading and provided a modest economic boost.
Looming Challenges and BOJ’s Policy Decision
According to Sakai, Japan’s economy could contract in the current January-March quarter due to factors such as the slowdown in the Chinese economy, production halts at Toyota Motor Corp and weak consumption.
Despite the pockets of weakness revealed in the data, Marcel Thieliant, head of Asia-Pacific at Capital Economics, believes the Bank of Japan (BOJ) will likely abandon negative interest rates by next month.
This anticipated move is fueled by the growing prospect of substantial pay hikes during annual wage talks with labor unions.
Thieliant noted, “The Bank of Japan tends to put more emphasis on its consumption activity index and doesn’t seem to be particularly concerned about the recent sluggishness in activity.”
The BOJ is scheduled to hold a two-day policy-setting meeting on March 18-19, where this crucial decision is expected to be made.
Wage Hike Demands and Inflation Concerns
Japan’s largest trade union confederation, Rengo, has demanded pay rises of 5.85% this year, topping 5% for the first time in 30 years.
The BOJ has long maintained that robust wage growth is a prerequisite for rolling back more than a decade of radical monetary experimentation.
However, recent data paint a concerning picture.
Inflation-adjusted real wages in January shrank for the 22nd consecutive month, while year-on-year household spending in the same month marked the biggest drop in 35 months.
As Japan navigates these economic challenges, the government and policymakers will closely monitor the situation and make necessary adjustments to ensure a sustained and robust recovery.
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