Japan’s economy has narrowly avoided a recession on weaker-than-expected consumption as it faces elevated inflation and a global economic slowdown.
Gross domestic product grew at an annualized 0.1% in the fourth quarter from the previous period, revised figures from the Cabinet Office showed Thursday. That was significantly below both initial estimates and economist forecasts, and meant Japan barely avoided two consecutive quarters of contraction.
Weaker private spending was the main factor behind the revision, rising less than initial estimates. The data suggested people went out less than expected during Japan’s latest COVID-19 wave, and lessened food purchases as prices rose. The ongoing weakness in the economy supports the central bank’s view that Japan still needs help from easy monetary policy.
"Economic activity and the pace of recovery aren’t strong enough” for change from the BOJ, said Saisuke Sakai, senior economist at Mizuho Research & Technologies. "The BOJ will maintain its monetary easing framework for the time being.”
Markets remain on alert for a final surprise from Bank of Japan Gov. Haruhiko Kuroda on Friday. But the central bank is leaning toward monitoring the impact of recent tweaks to its stimulus program rather than making another adjustment, according to people familiar with the matter.
During parliamentary hearings last month, incoming BOJ governor Kazuo Ueda also said that it’s appropriate for Japan to maintain monetary easing. That view was shared by his two deputy governor nominees. All three are expected to be approved by the Upper House of parliament in a vote Friday, following a vote in the Lower House on Thursday.
"Looking ahead, we expect GDP growth to slow in 1Q23, as higher inflation takes a toll on consumer spending and weakening external demand crimps exports. Spending by domestic travelers and foreign tourists should continue to support the economy,” Bloomberg economist Yuki Masujima said.
Analysts largely agree that the country will undergo a gradual recovery.
Still, a mixture of factors complicates the outlook, including uncertainty over consumption. While returning foreign tourists, domestic travel subsidies and Prime Minister Fumio Kishida’s stimulus package are expected to help domestic spending, inflation will keep weighing on households and businesses’ activities.
As price gains continue to be elevated, real wages have fallen for 10 consecutive months, a key factor standing in the way of the BOJ achieving its sustainable 2% inflation goal.
"The main reason behind the revised GDP numbers is a downward revision in consumption,” said Wakaba Kobayashi, an economist at Daiwa Institute of Research. "With the eighth wave of COVID-19 happening then, the pace of consumer recovery wasn’t that strong.”
Another downside risk is the global economic slowdown stemming from ongoing interest rate hikes by central banks around the world. Although the pace of tightening has recently slowed, there have already been signs of cooling economic activity in the U.S. and Europe.
The global economic setback may also curb Japanese manufacturers’ otherwise relatively resilient appetite for investing.
China’s reopening is generally seen as a positive factor, but it’s unclear when that impact will start fully kicking in. Exports to China from Japan have declined for two straight months since December.
"I don’t think the economic slowdown in the U.S. and Europe will be that severe,” said Mizuho Research’s Sakai. "I expect the Japanese economy to maintain positive growth in the January to March period, albeit only at a moderate 1% annualized growth rate.”
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