Japan’s fourth-quarter economic expansion tops expectations as exports rise; full-year growth slows

Japan’s economic expansion in the fourth quarter beat analysts’ expectations for quarter-on-quarter and annualized growth, boosted by a jump in exports.

Preliminary government data showed Monday that GDP grew 0.7% quarter on quarter, more than the 0.3% rise expected by economists polled by Reuters. It expanded by 0.4% in the previous quarter.

A jump in exports helped boost GDP, while domestic demand was a drag on growth, contracting marginally. Capital expenditure also rose 0.5% quarter-on-quarter, but missed Reuters estimates of a 1% rise.

Nominal household consumption grew significantly faster than real consumption and their divergence remained wide, said Krishna Bhimavarapu, APAC economist at State Street Global Advisors, adding that it may activate the Bank of Japan’s “inflation fighting mode.”

“At the very least, this data removes the fears of stalling consumption, and is positive for the BOJ to deliver another hike, which could now come sooner rather than later,” Bhimavarapu said.

The GDP data on Monday comes against the backdrop of Japan’s central bank raising rates to 0.5% — their highest level since October 2008 — and offers it more room to stick with monetary tightening.

Japan’s November and October household spending contracted 0.4% and 1.3%, respectively, year on year in real terms, but it rose 2.7% in December — massively beating expectations from economists polled by Reuters and marking its first rise since July 2024.

Citi economist Katsuhiko Aiba warned earlier this month that consumer spending will remain weak in the first quarter, forecasting a full-scale recovery after the second quarter.

He said that real wage growth is likely to remain negative in the first quarter as well, despite government energy subsidies resuming, pressured by pass-through inflation from yen depreciation.

On an annualized basis, GDP grew 2.8%, exceeding Reuters estimate of 1%.

Japan’s economy grew 1.2% year on year in the fourth quarter, compared with the 0.6% rise in the third quarter.

Despite the better-than-expected growth in the fourth quarter, full-year GDP growth slowed to 0.1%, a sharp fall from the 1.5% growth seen in 2023.

The Nikkei 225 fell 0.29% after the data release, while the yen strengthened 0.2% to trade at 152.02 against the dollar.