Asia Economy

Japan's economy averts recession, but rebounds much less than expected in fourth quarter

A Japanese national flag flies outside the Bank of Japan headquarters in Tokyo, Japan, on Sept. 27, 2021.
Toru Hanai | Bloomberg | Getty Images

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

While private consumption is holding up against headwinds from rising living costs, uncertainties over the global economic outlook will weigh on Japan's delayed recovery from the scars of the Covid-19 pandemic, analysts say.

The world's third-largest economy expanded an annualized 0.6% in the final quarter of last year after slumping a revised 1.0% in July-September, government data showed on Tuesday.

The increase in gross domestic product (GDP) was much smaller than a median market forecast for a 2.0% rise, due to a downswing in capital expenditure and inventory.

"With other advanced economies heading into recessions, we still expect net trade to drag Japan into a recession as well in the first half, especially since business investment is weakening faster than we had expected," said Darren Tay, Japan economist at Capital Economics.

Inflation in Japan is 'very close' to peaking, says strategist
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Inflation in Japan is 'very close' to peaking, says strategist

Private consumption, which accounts for more than half of Japan's GDP, rose 0.5% in the fourth quarter, matching a median market forecast.

But capital expenditure fell 0.5%, more than market forecasts for a 0.2% decline, the data showed.

External demand added 0.3 percentage point to growth, against a 0.4 point contribution projected by analysts.

"From a negative growth in July-September, the rebound isn't very impressive," said Toru Suehiro, chief economist at Daiwa Securities.

"We can expect consumption to pick up as service spending stabilizes. But it's difficult to project a strong recovery partly due to pressure from rising inflation," he said.

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

Policymakers hope a rebound in domestic consumption, driven by savings accumulated during the pandemic, will last long enough for wages to pick up and cushion the blow on households from 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 soon the central bank could phase out its massive stimulus program.