Japan’s economy expanded at a faster-than-expected pace in the fourth quarter of 2024, driven by increased business spending and a positive contribution from net trade. This robust performance marks the third consecutive quarter of growth, reinforcing the Bank of Japan’s (BOJ) trajectory towards further interest rate increases. The yen responded to the news with a noticeable strengthening.
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Gross domestic product (GDP) surged at an annualized rate of 2.8% in the October-December period, exceeding the revised 1.7% growth of the previous quarter and surpassing the 1.1% consensus forecast from economists, according to a report released Monday by the Cabinet Office.
While the data paints a picture of sustained economic expansion, underlying vulnerabilities exist. The growth in net exports was partly attributed to a decline in imports, raising concerns about the robustness of domestic demand. Although private consumption edged up slightly, exceeding predictions, its pace slowed considerably compared to the previous quarter. Furthermore, annual figures reveal that private consumption in 2024 remained below levels seen a decade earlier.
BOJ Rate Hike Outlook Remains Positive
Despite these challenges, the overall positive growth trend is likely to bolster the BOJ’s confidence in its gradual shift away from ultra-easy monetary policy. The central bank is expected to continue seeking opportunities for measured interest rate hikes.
“Personal consumption has experienced a significant slowdown, with inflation impacting spending power as real wages struggle to gain traction,” noted Yuichi Kodama, an economist at Meiji Yasuda Research Institute. “Nevertheless, the broader economic growth picture suggests the BOJ will likely maintain its course toward gradual interest rate adjustments.”
Bloomberg Economics supports this view, stating that the increase in investment and resilient consumption indicate the BOJ’s rate hikes haven’t significantly hampered the private sector.
Yen Strengthens on Positive Economic News
The GDP figures are scheduled for revision in March, shortly before the BOJ’s next policy meeting. While economists anticipate the BOJ will likely postpone its next rate hike until the summer, the yen reacted positively to the strong economic data, appreciating to 151.75 per dollar from 152.36 prior to the announcement. Prime Minister Shigeru Ishiba recently introduced an economic stimulus package with price relief measures aimed at mitigating the impact of inflation.
Trade Outlook and Future Growth
Net exports contributed positively to GDP growth due to a decline in imports influenced by falling energy prices. Exports saw a moderate increase, buoyed by robust spending from inbound tourists, whose expenditures are classified as service exports. Looking ahead, the trade outlook remains somewhat uncertain, particularly in light of potential trade tensions and tariff threats from the US.
“While uncertainty surrounds goods exports, the services sector, particularly inbound tourism, is expected to maintain its growth momentum, albeit potentially at a moderated pace,” commented Kazuki Fujimoto, an economist at the Japan Research Institute. “Overall, the trajectory for exports appears positive.”
Japan Achieves Nominal GDP Milestone
The strong fourth-quarter performance enabled Japan’s economy to achieve a modest 0.1% growth for the full year 2024, exceeding market expectations of a contraction. Significantly, nominal GDP surpassed ¥600 trillion for the first time, fulfilling a long-standing goal set by former Prime Minister Shinzo Abe nearly a decade ago. However, the annual growth rate remains the weakest since the pandemic. The yen’s depreciation against the dollar has impacted Japan’s global economic standing, reducing the dollar value of its output.
Conclusion: Sustained Growth with Underlying Challenges
Japan’s economy continues to demonstrate resilience with a third consecutive quarter of growth, exceeding expectations and supporting the BOJ’s path toward further interest rate hikes. However, underlying vulnerabilities, such as weakened domestic demand and the impact of inflation on consumption, warrant attention. While achieving a historic nominal GDP milestone, Japan faces challenges in maintaining strong growth momentum amidst global economic uncertainties.
