Japan recently avoided a technical recession, with revised official data indicating a return to growth in the October-December period of the previous year. The boost in the economy was primarily due to strong capital expenditure. Despite the positive growth, the upward revisions were not as robust as expected, as private consumption remained weak. The GDP expanded by only 0.4% in the fourth quarter compared to the same period a year earlier, missing the consensus forecast of 1.1% growth in a Reuters poll.
There are speculations that the Bank of Japan might consider normalizing interest rates earlier than anticipated, potentially during the March 18-19 meeting. This speculation comes as a result of promising signs of substantial wage gains during this year’s Shunto spring wage negotiations between unions and employers. However, the high inflation in the country has significantly stifled domestic demand and private consumption. The fragility of growth in Japan is underscored by the consistent decline in private consumption over the past three quarters.
The noteworthy aspect of the revised data was the significant upward revision in business investment, which went from an initially reported 0.1% quarter-on-quarter decline to a 2.0% quarter-on-quarter increase. Despite this positive development, the revision faced offsetting factors such as a drag from inventories and a slightly more substantial fall in private consumption. This trend further emphasizes the consistent decline in consumption trends.
Capital expenditure during the same period saw a substantial increase of 2% quarter on quarter. This figure was a stark contrast to the government’s preliminary estimate of a 0.1% decline. However, the increase fell short of the consensus expectations of a 2.5% rise. The hopes for an upward revision in GDP were somewhat buoyed by Ministry of Finance data released earlier, showcasing a significant rise in capital expenditure over the year.
While Japan’s economy managed to avoid a technical recession, the growth remains fragile and vulnerable. The consistent decline in private consumption paired with high inflation poses challenges to sustained economic growth. The potential normalization of interest rates and the positive trends in capital expenditure provide some optimism for the future, but a comprehensive and strategic approach is necessary to navigate through the delicate economic landscape in Japan.