Japan avoids recession, but fourth-quarter GDP rebound much smaller than expected

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Japan avoids recession, but fourth-quarter GDP rebound much smaller than expected

Japan’s economy avoided recession but rebounded much less than expected in October-December as business investment plummeted, a sign of the central bank’s challenge in phasing out its massive stimulus program.

The world’s third largest economy grew by 0.6% annualized in the Last quarter last year, after falling a revised 1.0% in July-September, according to government data released on Tuesday.

The increase in gross domestic product (GDP) was well below the average market forecast of a 2.0% increase, due to falling capital expenditure and inventories.

“With other advanced economies entering recession, we continue to expect net trade to drag Japan into recession in the first half as well, especially as business investment is weakening faster than we expected,” said Darren Tay, Japan economist at Capital Economics.

Private consumption, which accounts for more than half of Japan’s GDP, rose 0.5% in the fourth quarter, matching the average market forecast. However, capital expenditures fell 0.5 percent, above market forecasts for a 0.2 percent decline, the data showed.

“Since negative growth in July-September, the rebound is not very impressive,” said Toru Suehiro, chief economist at Daiwa Securities (TYO:8601). “We can expect consumption to pick up as spending on services stabilizes. But it is difficult to project a strong recovery, partly due to the pressure of rising inflation.”

Japan has seen an increase in the number of foreign visitors since ending some of the world’s strictest border controls in October to prevent the spread of the COVID-19 pandemic.

Policymakers expect the pickup in domestic consumption, driven by savings accumulated during the pandemic, to last long enough for wages to pick up and cushion the impact on households of rising food and fuel costs.

With inflation exceeding the Bank of Japan’s 2% target, the outlook for the economy and wages will be key to how long the central bank could phase out its massive stimulus program.

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