Japan’s economy rebounded at a slower pace than expected in the three months through December, in a sign of ongoing weakness that will concern the central bank’s new governor amid intense speculation over possible changes in monetary policy after a decade of massive stimulus.
(Bloomberg) — Japan’s economy rebounded at a slower pace than expected in the three months through December, in a sign of ongoing weakness that will concern the central bank’s new governor amid intense speculation over possible changes in monetary policy after a decade of massive stimulus.
Gross domestic product expanded at an annualized pace of 0.6% in the fourth quarter, turning positive after a revised 1% contraction over the summer, the Cabinet Office reported Tuesday. The figure came up short of analysts’ estimates of 2% growth.
While consumption recovered, helped by domestic travel spending, businesses cut back on their outlays more than forecast and inventories dragged heavily on the economy.
The result came out just before the government is set to submit a nomination for the new Bank of Japan governor to parliament. The weaker-than-expected rebound may be a cause for concern for the new chief, who will need to carefully weigh up the strength of Japan’s recovery and the sustainability of a BOJ stimulus framework subject to waves of speculative attacks.
“The results were surprisingly weak and this shows it will take longer before the economy can get back to its pre-Covid level,” said Mari Iwashita, chief market economist at Daiwa Securities Co. “We can’t be optimistic about the first quarter, either, because data like industrial production are already showing the impact of the global slowdown.”
The drop in inventories jumped out as the biggest drag on the recovery. A drawing down of product stockpiles can sometimes be interpreted as a positive for the economy showing stronger demand than expected, but Iwashita was unconvinced.
Another interpretation was that companies didn’t want to restock inventories because they are concerned about the outlook, she said.
What Bloomberg Economics Says…
“Looking ahead, we see growth slowing in 1Q23, as higher inflation takes a toll on consumer spending and weakening external demand crimps exports. Spending by domestic travelers and foreign tourists should continue to support the economy.”
— Yuki Masujima, economist.
For the full report, click here
Government officials also sounded a note of caution about the economy’s momentum. Finance Minister Shunichi Suzuki said the result showed the economy was gradually recovering with the help of government measures.
“But with global monetary tightening continuing, the slowdown in overseas economies could still drag on Japan’s economy as well,” Suzuki said. “We also need to pay attention to the impact from inflation, supply constraints, volatility in financial markets and the spread of Covid cases in China.”
These are among the factors the new BOJ chief will need to consider after taking the helm in April. Prime Minister Fumio Kishida is set to pick Kazuo Ueda, a professor and former BOJ board member, to succeed Governor Haruhiko Kuroda. The choice suggests that while Kishida may be seeking some changes at the BOJ, he’s not seeking a drastic pivot.
Read More: Ueda Set for Central Bank Nomination as a BOJ-Favored ‘Outsider’
The country’s GDP has been going back-and-forth between growth and contraction, complicating the central bank’s ability to judge the strength of Japan’s economic recovery and whether it has regained its pre-pandemic strength.
A recovery in the yen was one of the main factors helping swing the economy back to a growth path in the fourth quarter after it shrank during the summer’s collapse in the currency.
Domestic consumption also helped support the recovery. A travel subsidy program for residents boosted activity in the service sector, which accounts for 60% of Japan’s total domestic consumption.
Still, the Japanese economy is surrounded by many uncertainties. One of these is the global economic slowdown, which has begun to weaken the country’s otherwise recovering exports, especially to China. Firms already appear to be slowing down capital investment in the face of further slowdown risks.
(Updates with more details from the report, economist comments)
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