Japan's Economy Surges in Q4, Beating Expectations

Japan's economy grew at an annualized rate of 2.8% in the October-December quarter, exceeding market expectations and signaling robust domestic demand, according to government data released Monday, as reported by Reuters. This outperformance, driven by stronger-than-anticipated business spending and consumption, is likely to bolster the Bank of Japan's plans for further interest rate hikes and monetary policy normalization.

The GDP expansion surpassed the median market forecast of 1.0% and followed a revised 1.7% growth in the previous quarter. On a quarterly basis, the economy grew by 0.7%, exceeding the 0.3% median estimate.

"Even though the jump in (fourth-quarter) GDP wasn't broad-based, it supports our view that the Bank of Japan will tighten policy more aggressively this year than most anticipate," said Marcel Thieliant, head of Asia-Pacific at Capital Economics, to Reuters.

Private consumption, representing over half of Japan's economic output, rose by 0.1%, defying expectations of a 0.3% decline. This unexpected increase is attributed to large year-end bonuses, according to Kazutaka Maeda, an economist at Meiji Yasuda Research Institute. However, Maeda anticipates a potential dip in consumption from January onwards as underlying consumer confidence remains weak amidst rising food prices.

Uichiro Nozaki, economist at Nomura Securities, noted that the overall GDP figure was somewhat inflated by a decrease in imports, which positively impacted the net trade contribution to growth.

The BOJ is closely monitoring consumption and wage trends to gauge the overall strength of the economy and determine the need for further rate hikes. While recent indicators for wages and household spending have shown positive signs, analysts remain wary of the potential impact of price pressures on a full-fledged recovery in personal consumption.

Capital spending, a key driver of private demand-led growth, increased by 0.5% in the fourth quarter. This fell short of the 1.0% market expectation but reversed a decline observed in the previous quarter. Net external demand, or exports minus imports, contributed 0.7 of a percentage point to growth, reversing a negative contribution from the July-September period.