Japan’s economy grew faster than expected in Q4, driven by improved business investment and a surprise uptick in consumption, reinforcing the case for further interest rate hikes by the Bank of Japan (BOJ).
Preliminary data showed a 2.8% annualized GDP increase, surpassing the 1.0% growth forecast. However, analysts noted that the headline figure was boosted by falling imports, which improved net trade, and seasonal year-end bonuses. Meanwhile, GDP growth for the 3rd quarter was revised up to 1.7% from 1.2%.
Private consumption, making up over half of Japan’s economy, edged up 0.1%, defying expectations of a decline (-0,3%) but slowing from the previous quarter’s 0.7% rise. Capital spending increased 0.5%, reversing a prior drop but falling short of the anticipated 1.0% gain.
Net external demand contributed 0.7 percentage points to growth, helped by weaker imports, which analysts said might signal subdued domestic demand. Economy Minister Ryosei Akazawa warned that rising food prices could weigh on consumer sentiment.
Japan also faces external risks, including potential disruptions from U.S. trade policies. The U.S., Japan’s top export destination, accounts for one-fifth of its total exports.
Despite uncertainties, the data supports the BOJ’s view that economic conditions remain strong enough to continue raising interest rates. However, policymakers are expected to proceed cautiously.
Japan’s nominal GDP reached 609.29 trillion yen ($4 trillion) in 2024, exceeding 600 trillion for the first time but keeping the country as the world’s fourth-largest economy behind Germany.