Japanese growth moderates, but eighth consecutive quarter of positive GDP growth confirmed

The preliminary estimate for Japan fourth quarter real GDP growth came in at 0.5% (quarter on quarter, annualised), undershooting expectations of 1% and moderating from 2.2% in Q3. Nonetheless, this confirmed the first positive eight-quarter run for real GDP growth in 28 years.

In contrast to the third quarter, growth in the fourth quarter was driven by a pick up in domestic demand, while external demand did not contribute.

Within domestic demand, growth was mixed. Private consumption increased 1.9% (quarter on quarter, annualised), following a 2.5% contraction last quarter. In turn, consumption was the only driver of growth, adding 1 percentage point (pp).  

On the investment side, growth in capital expenditure offset falls in residential and public investment. Inventory investment1 was a 0.3pp drag on real growth, following a strong contribution to growth in the third quarter.

Despite sustained strong growth in exports, net exports took 0.1pp off growth. This was due to an acceleration in imports, which usually occurs alongside a recovery in domestic demand.

Meanwhile, the GDP deflator, a measure of inflation, fell to 0% (year on year) from 0.2% in the third quarter, although the domestic measure remained positive at 0.5%.

In terms of policy implications, the Bank of Japan is likely to maintain the view that the Japanese economy remains steady in a backdrop of a strong global economy. We expect the reappointment of the current Bank of Japan Governor, Haruhiko Kuroda, whose term ends in April. This should allow the Bank of Japan to provide more clarity on the monetary policy outlook.

The yen continues to strengthen due to a combination of a weaker dollar and risk aversion.

1. Inventory investment is a component of GDP. It indicates the difference between goods produced by a country versus goods sold.