HG MARKETS:

Japan’s economy grew at a faster-than-expected pace in the fourth quarter of 2024, driven by improved business spending and an unexpected rise in private consumption, reinforcing the Bank of Japan’s (BOJ) case for further interest rate hikes. Preliminary data released on Monday indicated that gross domestic product (GDP) expanded at an annualized rate of 2.8% in the October-December period, significantly surpassing the median market forecast of 1.0%, as estimated in a Reuters poll.

Despite these encouraging figures, underlying data suggests that the economy may not be as strong as the headline growth number implies. The annualized increase follows a revised 1.7% growth in the previous quarter and translates into a quarterly expansion of 0.7%, exceeding the market estimate of 0.3%. However, the overall GDP figure was partly boosted by a decline in imports, which improved net trade, as well as the impact of year-end bonuses.

Private consumption, which constitutes more than half of Japan’s economic output, edged up by 0.1% in Q4, defying market expectations of a 0.3% contraction. However, this marked a slowdown from the 0.7% growth recorded in the previous quarter. Consumption benefited from robust year-end bonuses, but warned that this boost may fade in early 2025, potentially leading to a decline in spending.

Capital expenditure, a key driver of private demand-led growth, increased by 0.5%, reversing the previous quarter’s decline. However, this fell short of the anticipated 1.0% rise, highlighting the volatility of corporate investment, which has historically been subject to significant revisions that impact overall GDP calculations. The government is set to release revised GDP figures for the December quarter on March 11.

Net external demand, defined as exports minus imports, contributed 0.7 percentage points to overall growth, reversing a negative impact from the July-September period. However, the decline in imports may indicate subdued domestic demand rather than an outright improvement in trade dynamics. Economy Minister Ryosei Akazawa stated that Japan’s economy is expected to maintain a gradual recovery. However, he cautioned that rising prices for food and other essential goods could exert downward pressure on consumer sentiment, potentially dampening household spending in the coming months.

The latest GDP data lends support to the Bank of Japan’s stance that domestic demand, inflation, and overall economic growth are sufficiently stable to justify continued interest rate increases in 2025. While the data does not suggest an urgent need for rapid rate hikes, it also does not indicate a scenario in which the BOJ would be compelled to halt its tightening measures. Japan’s nominal GDP in 2024 reached 609.29 trillion yen ($4 trillion), surpassing the 600 trillion yen threshold for the first time. However, despite this milestone, Japan remained the world’s fourth-largest economy, trailing Germany.

Looking ahead, potential risks to Japan’s economy include global trade uncertainties, particularly those stemming from U.S. tariff policies under President Donald Trump. The United States remains Japan’s largest export market, accounting for approximately 20% of total exports, making it a crucial factor in Japan’s external economic outlook. The upcoming months will be pivotal in determining whether Japan’s economic recovery remains on track, particularly as policymakers navigate inflationary pressures and external trade challenges.