Japan's economic performance in the fourth quarter exceeded market expectations, with a quarterly annualized GDP of 2.8%, far above the general market expectation of 1.1%, leading to a strengthening of the yen. Economists expect the Bank of Japan to raise interest rates again this summer. Overnight index swaps indicate that the market believes there is over an 80% chance of the Bank of Japan raising interest rates before July.
Benefiting from business investments and net export growth, Japan's GDP has expanded for the third consecutive quarter, providing support for further interest rate hikes by the Bank of Japan.
On Monday, February 17, the latest data released by Japan's Cabinet Office indicated that the Japanese economy performed better than market expectations in the fourth quarter of 2024, with a quarter-on-quarter annualized growth rate of 2.8%, significantly higher than the generally expected 1.1%, and also exceeding the revised value of 1.7% from the previous quarter, which includes:
Private consumption grew by 0.1%, higher than the expected -0.3%; business investment increased by 0.5%, lower than the expected 0.9%; and net exports grew by 0.7%, higher than the anticipated 0.4%.
Despite the overall good economic performance, the report also showed some signs of weakness. On one hand, the growth in net exports was partly due to a decline in imports, raising concerns in the market about the health of domestic demand in Japan.
On the other hand, although private consumption rose slightly and exceeded expectations, the growth rate has significantly slowed compared to the previous quarter. Furthermore, from an annual data perspective, total private consumption in 2024 is below levels from ten years ago, reflecting the ongoing pressure of inflation on consumption.
However, Yuichi Kodama, an economist at Meiji Yasuda Life Research Institute, stated:
"Although inflation exerts pressure on consumption, the overall economy is still growing, so the Bank of Japan may continue to gradually raise interest rates as planned."
Currently, economists expect the Bank of Japan to raise interest rates again this summer. Overnight index swaps indicate that the market believes there is over an 80% chance that the Bank of Japan will raise rates before July, and the possibility of a rate hike before September has been fully priced in.
In terms of policy, Prime Minister Shigeru Ishiba is seeking to address the impact of inflation through a package of economic stimulus plans. According to media reports, since Ishiba's minority government is negotiating with small opposition parties on measures such as increasing the income tax exemption limit and free high school tuition, more voter-friendly policies may be introduced in the future.
It is worth noting that despite a strong performance in the fourth quarter, Japan's GDP growth for the entire year of 2024 is only 0.1%, the weakest growth since the pandemic. At the same time, due to the weak yen, Japan's status in the global economy has declined, currently ranking fourth globally.
As Japan's economy continues to recover, bullish sentiment towards the yen is also warming up. Data from the Commodity Futures Trading Commission shows that as of the week ending February 11, asset management companies had net long positions in yen at their highest level in nearly four years. So far this year, the yen has become the best-performing currency against the dollar among G10 currencies.
After today's GDP data was released, the Exchange Rates of the USD to JPY fell by 0.46%, currently reported at 151.612.
The Japan 10-Year Treasury Notes Yield rose to 1.375%, reaching its highest level since 2010.
Editor/ping