Japan’s economy barely grew in Q4, weak consumption raises policy challenge By Reuters

© Reuters. FILE PHOTO: Shoppers check foods at a supermarket in Tokyo, Japan January 10, 2023. REUTERS/Issei Kato/

By Kantaro Komiya and Eimi Yamamitsu

TOKYO (Reuters) -Japan’s economy narrowly averted a recession at the end of last year, barely growing in the fourth quarter on frail consumption, revised data showed on Thursday, underscoring the challenge for policymakers trying to shore up a stuttering recovery.

Record high inflation and slowing global growth amid monetary tightening across many countries have undermined the world’s third-biggest economy’s post-pandemic revival, despite relaxation of COVID curbs, energy subsidies and ultra-easy monetary policy.

Businesses, under government pressure to increase wages to boost household consumption, are struggling to motor on in the face of muted demand.

Gross domestic product (GDP) in the world’s third-biggest economy expanded by an annualised 0.1% in October-December, against a preliminary estimate of a 0.6% expansion and much lower than economists’ median forecast for a 0.8% rise in a Reuters poll. That followed a 0.8% contraction in July-September.

The expansion translates into an almost flat 0.02% quarter-on-quarter change, data released by the Cabinet Office showed, against a preliminary reading and economists’ estimate for 0.2% growth.

“There was a less strong recovery in services consumption, while rising inflation likely curbed it as well,” said Wakaba Kobayashi, economist at Daiwa Institute of Research.

Private consumption, which makes up more than half of the country’s GDP, grew 0.3%, the data showed, downgraded from an initial estimate of a 0.5% increase.

Spending on services such as restaurants and hotels grew from July-September but not as strongly as initially thought, a government official told a media briefing. Consumption of goods was also less solid than previously estimated, the data showed.

Capital spending fell 0.5%, unchanged from a preliminary estimate and compared with a median market forecast for a 0.4% contraction, even as Ministry of Finance data last week showed an uptick in manufacturers’ output capacity in the fourth quarter.

Domestic demand as a whole knocked 0.3 percentage point from revised GDP growth, slightly more than initially estimated, while net exports added 0.4 percentage point.

Japan’s economy is being buffeted by slowing overseas demand due to deteriorating global growth, resulting in a record trade deficit and the largest factory output contraction in eight months in January.

Domestic demand is providing some support to the economy thanks to Japan’s relaxation of COVID-19 measures, including a border control easing for international tourists in October, but four-decade-high inflation is undercutting the prospects of a consumption-driven recovery.

In an effort to boost households’ purchasing power, the government and the Bank of Japan are urging firms to hike workers’ wages at the annual “shunto” spring wage negotiations wrapping up this month.

Major companies are set to deliver the largest pay rise in 26 years, but it will likely include just a 1% increase in base pay, casting doubt on whether Japan can achieve the kind of sustained wage gains the central bank sees as key to stably hitting its 2% inflation target.