Japan’s fragile Q4 economic recovery poses early test for Takaichi
City skyline and harbour are seen at sunrise from a bus window in Tokyo, Japan, on Jul 24, 2021. (Photo: REUTERS/Maxim Shemetov)
TOKYO: Japan's economy limped back to meagre growth in the fourth quarter, significantly missing market expectations in a key test for Prime Minister Sanae Takaichi's government as cost-of-living pressures drag on confidence and domestic demand.
Fresh off a sweeping election victory, Takaichi's administration is preparing to ramp up investment through targeted public spending to shore up consumption and revitalise economic growth.
Monday's data brings sharp focus to the challenge at hand for policymakers at a time when the Bank of Japan has reiterated its pledge to keep raising interest rates and normalise monetary settings from years of ultra-low borrowing costs amid persistent inflation and a weak yen.
"PM Takaichi's efforts to reflate the economy via looser fiscal policy look prescient," said Marcel Thieliant, head of Asia-Pacific at Capital Economics.
Gross domestic product in the world's fourth-largest economy increased an annualised 0.2 per cent in the October-December quarter, government data showed, well short of a median estimate of a 1.6 per cent gain in a Reuters poll. It barely scraped back to growth from a larger revised 2.6 per cent contraction in the previous quarter.
The reading translates into a quarterly rise of 0.1 per cent, also weaker than the median estimate of a 0.4 per cent uptick.
"It shows that the economy's recovery momentum is not very strong," Meiji Yasuda Research Institute economist Kazutaka Maeda said. "Consumption, capital expenditure and exports - areas we hoped would drive the economy - just haven't been as strong as we expected."
The surprisingly soft momentum will keep investors on alert for Takaichi's campaign pledge to suspend a consumption tax, an issue that sparked turmoil in Japanese markets worried about fiscal slippage in a nation with the heaviest debt burden in the developed world.
"In fact, sluggish economic activity increases the chances that Takaichi will not only press ahead with suspending the sales tax on food but enact a supplementary budget during the first half of the fiscal year that starts in April already rather than wait until the end of this year," Capital Economics' Thieliant said.
Japanese stocks stuttered in the wake of the GDP data, while bonds were subdued.
SLOWER RATE HIKES?
Analysts project Japan will continue to expand at a gradual pace this year, though the fourth quarter's weak outcome suggests the economy might struggle to fire on all cylinders.
"Whether the economy can achieve sustainable growth really depends on whether real wages can firmly return to positive growth," Shinichiro Kobayashi, principal economist at Mitsubishi UFJ Research and Consulting, said.
A survey this month by the Japan Center for Economic Research showed 38 economists forecast an average annualised GDP growth of 1.04 per cent in the first quarter and 1.12 per cent in the second quarter.
Economists say the latest GDP report is unlikely to affect the Bank of Japan's policy decisions, but Takaichi's historic election win has heightened market attention to whether the dovish premier will renew her calls for interest rates to be kept low.
"Although GDP posted positive growth this time, the momentum was weak, and with the need to assess the impact of the December rate hike, the likelihood of an additional hike in the near term appears to have receded," said Takeshi Minami, chief economist at Norinchukin Research Institute. The country's inflation dynamic underscored the policy tensions between the government and central bank.
Mitsubishi UFJ's Kobayashi, for instance, expects the central bank to prioritise bringing inflation to heel.
"Rather than this rate hike causing the economy to stall, the BOJ's focus is likely to be on how to contain inflation," he said.
Private consumption, which accounts for more than half of economic output, rose 0.1 per cent in October-December, matching market estimates.
It cooled from the 0.4 per cent rise in the previous quarter, indicating that persistently high food costs remain a drag on household spending.
TRUMP FACTOR
Capital spending, a key driver of private demand-led growth, also rose at a slow pace of 0.2 per cent in the fourth quarter, versus a rise of 0.8 per cent in the Reuters poll.
To be sure, historically capex has been a volatile data set and future revisions could point to the economy carrying more momentum into 2026 than initial estimates suggest.
That still leaves the economy with a lot of catching up to do, especially as its key manufacturing industry struggles to adapt to a protectionist US administration under President Donald Trump.
Indeed, net external demand, or exports minus imports, contributed nothing to fourth-quarter growth, versus a 0.3-point drag in the July-September period.
Exports did post a milder drop after the US formalised a baseline 15 per cent tariff on nearly all Japanese imports, down from 27.5 per cent on autos and initially threatened 25 per cent on most other goods.
"The impact of tariffs appears to have peaked in July-September, but judging from the latest results, there is at least some possibility that firms will continue to take a somewhat cautious stance going forward," Meiji Yasuda's Maeda said.
