Japan’s gross domestic product (GDP) expanded in the fourth quarter (Q4), although the underlying rate of growth was disappointing, it was a sign the world’s third largest economy was struggling to regain momentum after a prolonged downtrend.
GDP expanded 0.2% in October-December, slightly below forecasts calling for a 0.3% gain, Tokyo’s Cabinet Office reported earlier this month. This translated into a year-over-year gain of 1%, roughly in line with estimates calling for 1.1%.
A closer look at the numbers reveals why the Q4 result was so disappointing. Household spending, which accounts for roughly 60% of GDP, was flat during the quarter. Rising fresh food and vegetable prices were largely to blame for the softer reading. Household spending has declined for ten consecutive months. The latest reading, which was released in December, showed a 0.3% decline compared to November.
With household consumption lagging, trade picked up the slack, as exports rose at the fastest pace in two years. External demand (exports minus imports) contributed 0.2 percentage point to GDP thanks to larger shipments of cars to the United States and China.
Japanese export growth was fueled by a weaker yen during the fourth quarter. The U.S. dollar rose 15% against the Japanese currency in the October-December period, reaching a high of 118 yen. That followed a period of unusual strength for the yen, which prompted the Japanese government to issue warnings against one-sided speculation on the currency.
A weaker local currency is desirable for Tokyo because it can influence exports to be more competitive on the international market.
Although December marked the fourth consecutive quarter of economic expansion, the pace of growth has weakened significantly. After contracting 0.3% in the fourth quarter of 2015, the economy has expanded 0.6%, 0.4%, 0.3% and 0.2% in each of the last four quarters. The unusually strong expansion at the start of 2016 was largely attributed to an extra leap year day in February.
The Bank of Japan (BOJ) has done just about everything in its power to support growth and re-inflate the economy. After years of slow progress, the central bank in September shifted course on monetary policy by targeting interest rates for 10-year government bonds. The jury is still out whether this new approach will finally produce faster growth in an economy struggling with decades of stagnation.
The Bank kept monetary policy on hold at last month’s meeting and raised its economic outlook, a sign officials were growing more confident in the direction of the recovery. For fiscal 2017, the BOJ raised its GDP growth forecast to 1.5% from 1.3%. The Bank also revised its 2018 growth outlook to 1.1% from 0.9%. The International Monetary Fund (IMF) has taken a more conservative approach, forecasting Japanese growth at 0.8% in 2017 and 0.5% in 2018.
Recent economic indicators ranging from manufacturing to employment suggest the Japanese economy may have turned a corner at the start of 2017. However, a more protectionist United States under President Donald Trump could spell bad news for the export-oriented economy. Prime Minister Shinzo Abe was a strong supporter of the 12-nation Trans-Pacific Partnership (TPP), a deal that is all but dead in the water after Trump signed an executive order withdrawing the United States from the pact.
In 2016, Japan recorded its first trade surplus in six years, giving President Trump plenty of ammunition in criticizing the country for its unfair advantage over the U.S. However, Trump struck a much more diplomatic tone earlier this month when he met Abe in Florida for the first time. The Japanese leader strategically avoided the contentious trade topic as he forged a new friendship with his Washington counterpart. Accruing to analysts, Abe’s personal rapport with Trump could strengthen relations between the countries at a time when Japan seeks security guarantees against threats from North Korea and China.
 Sam Bourgi (February 15, 2017). “Japanese Foreign Bond Investment Declined Last Week: Ministry of Finance.” Economic Calendar
 Tetsushi Kajimoto and Stanley White (February 12, 2017). “Exports prop up Japan fourth quarter GDP growth, U.S. protectionist risks loom.” Reuters.
 Stanley White (June 7, 2016). “Japan’s first-quarter GDP revised up, boosted by leap year gain.” Reuters.
 Leslie Shaffer (January 30, 2017). “Bank of Japan raises economic growth forecasts, keeps policy unchanged.” CNBC.
 International Monetary Fund (January 2017). World Economic Outlook: A Shifting Global Economic Landscape.
 Takashi Nakamichi (January 24, 2017). “Japan posts first trade surplus in 6 years.” Market Watch.
 Isabel Reynolds (February 12, 2017). “While Trump and Abe Bond, Their Deputies Talk Trade.” Bloomberg Politics.