Japan averted a technical recession as revised official data released on Monday showed the economy returned to growth in the October-December period last year, bolstered by strong capital expenditure. However, the upward revisions were weaker than estimated, with private consumption remaining weak.
The country's gross domestic product (GDP) expanded 0.4% in the fourth quarter compared with a year earlier, falling short of the consensus expectations for 1.1% growth in a Reuters poll. The latest figures come after provisional data last month had shown GDP contracting 0.4% in the fourth quarter, following a 3.3% contraction in the July-September period.
On a quarter-on-quarter basis, Japan's GDP expanded 0.1% in the fourth quarter, weaker than the median forecast for 0.3% growth in a Reuters poll. The economy had shrunk 0.8% in the third quarter from the preceding one.
"The upward revision to GDP growth in the second estimate released today ... was smaller than most had anticipated," wrote Marcel Thieliant, head of Asia-Pacific at Capital Economics, in a client note. "While there was a large upward revision to business investment, from the initially reported 0.1% q/q decline to a 2.0% q/q jump, that was partly offset by a drag from inventories and a slightly larger fall in private consumption. Indeed, the figures confirm that consumption has fallen for three consecutive quarters."
High inflation has crimped domestic demand and private consumption, underscoring the fragility of growth in the country. Private consumption fell 0.3% quarter-on-quarter, more than the provisional estimates of a 0.2% decline. Reuters reported that the Bank of Japan is likely to downgrade its assessment of consumption and factory output at its next policy board meeting on March 18-19, citing three people with knowledge of the matter.
Capital expenditure, on the other hand, jumped 2% quarter-on-quarter, compared with the provisional 0.1% fall the government had estimated. However, this figure was still below consensus expectations for a 2.5% increase. Hopes for an upward GDP revision were boosted after Ministry of Finance data released last Monday showed capital expenditure rose 16.4% in the fourth quarter from a year earlier and 10.4% on a seasonally adjusted quarterly basis.
Expectations are rising that the Bank of Japan may normalize interest rates as early as its March 18-19 meeting amid signs of robust wage gains at this year's Shunto spring wage negotiations between unions and employers. The revised GDP data has fueled speculation that the central bank could ditch negative interest rates, with board members' recent hawkish comments suggesting that Japan is moving towards the BOJ's 2% inflation target.
Despite the upward revision, Japan's economic growth remains weaker than expected, with private consumption continuing to be a drag on the economy. Inflation-adjusted real wages in January shrank for the 22nd month in a row, while year-on-year household spending in the same month marked the biggest drop in 35 months.
External demand contributed 0.2 percentage points to real GDP, unchanged from the preliminary reading, indicating that the global economic slowdown and ongoing trade tensions continue to weigh on Japan's export-dependent economy.
As the Bank of Japan prepares for its upcoming policy meeting, policymakers will have to carefully consider the balance between supporting economic growth and managing inflationary pressures. The revised GDP data, while better than initial estimates, highlights the challenges faced by the Japanese economy as it navigates a path towards sustainable growth in the face of domestic and global headwinds.
