Japan’s weak GDP rebound poses challenge for BOJ’s exit path

THE Japanese economy averted a recession but rebounded much less than expected in the fourth quarter of 2022 as business investment slumped, a sign of the challenge that the central bank faces in phasing out its massive stimulus programme.

Government data on Tuesday (Feb 14) showed that the world’s third-largest economy expanded by an annualised 0.6 per cent last quarter after slumping a revised 1 per cent from July to September. The data also showed that, for the full year, Japan’s economy expanded 1.1 per cent in 2022, down from 2.1 per cent the year before.

Analysts said that while private consumption was holding up against headwinds from rising living costs, uncertainties over the global economic outlook would weigh on Japan’s delayed recovery from the scars of the Covid-19 pandemic.

The increase in gross domestic product (GDP) was much smaller than a median market forecast for a 2 per cent rise. This was due to a downswing in capital expenditure and inventory.

Toru Suehiro, chief economist at Daiwa Securities, said: “From a negative growth in July to September, the rebound isn’t very impressive.”

“We can expect consumption to pick up as service spending stabilises. But it’s difficult to project a strong recovery, partly due to pressure from rising inflation,” he added.

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The weak data highlights the delicate task at hand for Kazuo Ueda, the government’s nominee to become the Bank of Japan’s (BOJ) next governor, as he plots a path towards normalising the bank’s ultra-easy policy without derailing a fragile economic recovery.

Policymakers are hoping that a rebound in consumption, driven by savings accumulated during the pandemic, will last long enough for wages to pick up and cushion the blow to households from rising food and fuel costs.

With inflation exceeding the BOJ’s 2 per cent target, the outlook for the economy and wages will be key to how soon the central bank could phase out its massive stimulus programme.

Takeshi Minami, chief economist at Norinchukin Research Institute, said: “It might be hard for the BOJ to normalise ultra-easy policy this year as overseas economies are slowing. The BOJ may have to wait until fiscal year 2024 at the earliest.”

While private consumption rose 0.5 per cent and external demand contributed 0.3 percentage point to growth, capital expenditure was a drag on the economy, falling a bigger-than-expected 0.5 per cent, the data showed. Private inventories also shaved 0.5 point off growth, as companies’ stock of automobile and raw materials declined.

Japan has seen an increase in the number of overseas visitors since October 2022, when it ended some of the world’s strictest border controls to prevent the spread of Covid-19.  Economic Revitalisation Minister Shigeyuki Goto told reporters that the economy was on course for a recovery as the pandemic’s impact faded.

“Rising inflation and the global slowdown are risks,” he said after Tuesday’s data release. “But corporate spending appetite hasn’t cooled... we’re not too pessimistic about the outlook.”

Some analysts, however, warned that global headwinds could weigh on the export-reliant economy and derail its recovery by discouraging manufacturers to hike wages.

Darren Tay, Japan economist at Capital Economics, said: “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.” REUTERS