Japan's Economy Defies Expectations with Solid Growth in Q4

Tokyo, Japan

Japan's economy exceeded forecasts in the fourth quarter of 2024, driven by robust business spending and net trade. This marks three consecutive quarters of growth, bolstering the Bank of Japan's (BOJ) plans for further interest rate hikes.

Key Points:

* Gross domestic product (GDP) grew at an annualized rate of 2.8% in Q4, surpassing the 1.1% consensus estimate.
* Net exports contributed to growth due to falling imports, potentially indicating weaker domestic demand.
* Private consumption edged higher but slowed markedly compared to the previous quarter, with annual growth remaining below 2014 levels.
* The yen strengthened to 151.75 per dollar after the GDP announcement.

BOJ's Rate Hike Trajectory

Despite pockets of weakness, the strong fourth-quarter performance gives the BOJ confidence to continue unwinding its ultra-easy monetary policy. Economists expect the BOJ to raise interest rates again in the summer.

Factors Driving Growth

Investment and resilient consumption suggest that the BOJ's rate hikes have not significantly impacted the private sector. Inbound tourism and exports fueled service sector growth.

Policy Implications

Prime Minister Shigeru Ishiba announced an economic stimulus package with price relief measures to combat inflation. The government is also negotiating with opposition parties to include higher income-tax allowances and free high school tuition in the upcoming budget.

Economic Outlook

Japan's trade outlook remains uncertain due to potential tariffs from the United States. However, economists anticipate continued growth in services, especially inbound tourism, despite a slower rate.

Global Economic Standing

Japan's GDP surpassed ¥600 trillion for the first time, although the weak yen has reduced the value of its goods and services in dollar terms. Japan remains the fourth-largest economy globally, but India is projected to overtake it in the coming years.