Japan's economy surprises with 2.8% growth in fourth quarter

Japan's economy continued to demonstrate resilience, as indicated by its growth in the fourth quarter of 2024. According to preliminary government data released on February 17, 2025, Japan's Gross Domestic Product (GDP) grew at an annualized rate of 2.8% from October to December 2024. This growth was bolstered primarily by significant increases in exports, which saw a rise of 4.3%, against a backdrop of moderate consumption. Although private consumption experienced a slight slowdown, rising by only 0.5% annually during the same period, the overall economic conditions remained favorable. Annual GDP growth compared favorably with the previous quarter, where a mere 0.6% increase was noted in the third quarter of 2024. Despite achieving a 0.7% quarter-on-quarter growth, which surpassed economists' expectations of 0.3%, the landscape for the entire year was less optimistic. For 2024 as a whole, Japan managed only a modest 0.1% growth in GDP, a stark contrast from the robust 1.5% growth recorded in the previous year. This sharp decrease raised concerns about the economy's ability to sustain momentum amid challenges such as domestic demand contraction and rising inflationary pressures. The Nikkei 225 index responded negatively to the economic data release, declining by 0.29%, while the yen appreciated marginally against the dollar. The Bank of Japan's recent decision to raise interest rates to 0.5%—the highest level since October 2008—was likely influenced by these growth figures. Analysts speculated that the Japanese central bank's response to stronger growth might include further rate hikes, especially as inflation levels align with the bank's target of 2%. The anticipated monetary tightening is crucial for Japan, which has struggled with deflationary pressures for several years, and the link between wage growth and consumer spending has never been more significant. Moreover, the improvement in household spending, which rose by 2.7% year-on-year in December 2024, was a critical component of economic health and suggests potential for future consumption recovery. Looking ahead, many anticipate that wage growth may counteract sluggish private consumption growth, providing a more optimistic outlook for Japan's economic trajectory in 2025. With the next monetary policy meeting set for March, market speculation continues regarding the Bank of Japan’s strategies amidst these evolving economic indicators.