Japan’s economy limped back to meager growth in the fourth quarter, posting a performance that fell far short of market expectations. The weak data presents an early and significant challenge for the new government, as persistent cost-of-living pressures continue to drag on consumer confidence and domestic demand.
Fresh off a sweeping election victory, the administration is preparing to ramp up investment through targeted public spending in an effort to shore up consumption and revitalize economic growth. The latest figures bring the scale of that challenge into sharp focus, especially as the central bank has reiterated its pledge to continue raising interest rates after years of ultra-low borrowing costs.
Gross domestic product for the world’s fourth-largest economy increased at an annualized rate of just 0.2% in the October-December quarter, according to government data. This was significantly weaker than the median estimate of a 1.6% gain and represents a bare return to growth following a revised 2.6% contraction in the previous quarter.
“It shows that the economy’s recovery momentum is not very strong,” one economist noted. “Consumption, capital expenditure, and exports—the areas we hoped would drive the economy—just haven’t been as strong as we expected.”
The surprisingly soft economic data will keep investors alert regarding the prime minister’s campaign pledge to suspend a consumption tax. This issue has previously sparked market turmoil over concerns about fiscal slippage in a nation carrying the heaviest public debt burden in the developed world. Some analysts suggest the sluggish growth increases the likelihood that the government will not only press ahead with the tax suspension but also enact an extra budget early in the new fiscal year.
While analysts still project the economy will continue to expand gradually this year, the weak fourth-quarter outcome suggests it may struggle to gain robust momentum. “Whether the economy can achieve sustainable growth really depends on whether real wages can firmly return to positive growth,” another economist commented.
The latest GDP report is unlikely to directly affect the central bank’s immediate policy decisions. However, the government’s historic election win has heightened market attention to whether its leader will renew calls for interest rates to be kept low. “Although GDP posted positive growth this time, the momentum was weak,” a chief economist said. “With the need to assess the impact of the last rate hike, the likelihood of an additional hike in the near term appears to have receded.”
This underscores the ongoing policy tension between the government’s focus on growth and the central bank’s priority of containing inflation. Private consumption, which makes up more than half of the economy, rose a scant 0.1%, indicating that high food costs remain a drag on household spending. Capital spending, a key driver of growth, also rose at a slow pace of 0.2%.
