Economy tops market expectations in Q4

Print more than doubles market expectations: GDP growth gained steam to 2.8% in seasonally adjusted annualized rate terms (SAAR) in the fourth quarter, up from 1.7% in the third quarter and exceeding market expectations. On an annual basis, economic growth picked up to 1.2% in Q4, following the previous period's 0.6% increase and marking the best result since Q2 2023. As a result, the economy eked out a 0.1% expansion over 2024 as a whole, dodging a contraction by a hair’s breadth.

Private spending remains resilient but shows signs of weakness: Q4’s print suggests that the Bank of Japan’s push to establish a “virtuous cycle” between higher wages and spending continues to bear fruit, with private consumption growing 0.5% in Q4 as salaries adjusted for inflation soared 6.3%. That said, this marked the weakest expansion in private spending since Q1 2024 (Q3: +3.0% SAAR). This suggests consumers may be struggling with high inflation and rising interest rates, as does the reading for imports of goods and services, which contracted 8.0% in Q4 (Q3: +8.1% SAAR). Looking at other components of domestic demand, government consumption increased 1.1% (Q3: +0.5% SAAR), while fixed investment bounced back by 1.1% (Q3: -0.8% SAAR). Finally, exports of goods and services increased 4.3% on a SAAR basis in the final quarter, which was below the third quarter's 6.1% expansion. However, because imports shrank, the contribution of net trade to GDP growth rose to 3.0 percentage points.

Panelist insight: EIU analysts said: “With downside risks aplenty, both monetary and fiscal policy must remain accommodating for Japan’s household consumption and corporate investment to maintain the positive momentum.” Nomura’s Yuki Kodera and Kyohei Morita commented: “Labor leaders, business leaders, and labor economists responding to a survey [by the Institute of Labour Administration] conducted between 2 December 2024 and 16 January 2025 collectively forecast a wage hike of +4.6% in the 2025 spring wage negotiations (shunto), which would be lower than the +5.3% hike realized in the spring of 2024. We at Nomura expect that the wage hike will ultimately be larger than the survey participants have forecast.”

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