Recent data released indicates that Japan's economy performed better than anticipated last year, defying the usual economic predictionsAccording to a preliminary statistical report published by the Cabinet Office of Japan on February 17, the nation’s real GDP is forecasted to witness a modest increase of 0.1% in 2024, a decline from the 1.5% growth seen in 2023.

This report also unveiled quarterly statistics revealing that Japan's real GDP experienced a quarter-on-quarter growth of 0.7% in the last quarter of the previous year, equating to an annualized growth rate of 2.8%. This outcome significantly surpassed market expectations, which were around 1.1%, and outpaced the previous quarter's revised figure of 1.7%. Therefore, Japan's GDP has recorded positive growth for three consecutive quarters.

Adding to the optimistic news, it was reported that Japan's nominal GDP breached the 600 trillion yen mark for the first time, reaching 609 trillion yen (approximately $4.05 trillion) in 2024, marking a year-on-year growth rate of 2.9%. This achievement also signifies four years of continuous nominal growthHowever, Japan remains positioned as the world’s fourth-largest economy, trailing Germany, which has projected a nominal GDP of $4.52 trillion in 2024.

The slight increase in Japan's overall GDP is attributed to the growth in the last quarter, which prevented the nation from experiencing negative growth for the yearAnalysts suggested that the 0.1% growth allowed for some manifestation of salary increases among Japanese companies, yet the economy still relies heavily on external demand, signifying a continued weakness in domestic consumption.

Bloomberg's senior economist Takaro Kimura pointed out that net exports, defined as exports minus imports, played a crucial role in driving economic growthThis boost is backed by strong foreign demand and a noticeable reduction in importsIncreased investment alongside robust consumer behavior indicates that the Japanese central bank's interest rate hikes have not negatively impacted private sector momentum.

In a statement, Japan's Economic Minister Akira Amari projected that the economy would continue its gradual recovery

Advertisements

However, digging deeper into the data paints a more complicated pictureAccording to a report by Xinhua, the Cabinet Office's detailed figures for 2024 revealed that domestic demand contributed just 0.2 percentage points to Japan's economic growthPrivate business investment in equipment increased by 1.2%, while public demand rose by 0.5%. Nevertheless, as prices surged at rates exceeding wage growth, the real income of citizens diminished, resulting in a decline of 0.1% in personal consumption, marking the first negative growth in four years.

Furthermore, investments in private housing dwindled by 2.3%. On the external front, demand's contribution to economic growth turned negative, with goods and services exports rising only by 1.0%, while imports increased by a slightly higher rate of 1.3%.

A thorough review of the latest data indicates that despite a modest uptick in personal consumption and equipment investment, the economic vitality of Japan seems lackingThe continued negative growth in imports over three quarters indicates a shortage of domestic demand.

Additionally, fluctuations in exchange rates have played a crucial roleLast year, the Japanese yen depreciated against the US dollar, reaching a historic low of 161 yen to one dollarConsequently, if evaluated with exchange rates in mind, Japan's external demand didn't grow significantly, largely attributable to the US dollar's appreciation.

Throughout 2024, the yen experienced volatility in the foreign exchange market, beginning the year at approximately 140 yen per dollar, diving to the aforementioned low, then recovering to 139 yen in September, before retreating to a range of 150 yen by the year's end.

The nominal GDP figure of 609 trillion yen had long been a target for former Prime Minister Shinzo Abe, who previously set a goal for Japan to reach this threshold before 2020. Unfortunately, this milestone has arrived four years later than planned.

Since 1973, Japan’s nominal GDP has grown roughly by 100 trillion yen every five years; however, after surpassing the 500 trillion yen mark in 1992, there was a troubling stagnation

Advertisements

The recent achievement of 600 trillion yen may appear promising, but it arrived late, and despite exceeding that value, valuation in US dollars reveals a stark reality.

Comparing exchange rates reveals nuances; in 2015, the exchange rate was about 120 yen to the dollar, whereas it stands between 150 to 160 yen nowWhen priced in dollars, Japan’s nominal GDP in 2015 was approximately $5 trillion, yet it has since shrunk to roughly $3.75 trillion to $4 trillion todayThus, while nominal GDP rankings may boast growth, the value relative to the dollar has significantly diminished.

The Japanese government's recent statistics portray an economy that, although outwardly impressive, contains troubling undercurrentsThe leading role of personal consumption, which accounts for over half of Japan's GDP, is diminishing, demonstrating that support from domestic demand and equipment investment remains insufficient for robust economic health.

Challenges further loom on the horizon, as this year, the probability of negative growth remains highThe price of essential goods continues to hover at elevated levels, outpacing the average wage growth, thus increasing the burden on the everyday lives of Japanese citizensMoreover, as exports remain a vital component of Japan's economy, any potential future tariffs imposed by the incoming US government could pose significant threats to sustaining economic growth.

On the 12th, following announcements of 25% tariffs on all US-bound aluminum and steel imports, Japan's Chief Cabinet Secretary Hiroshi Matsuno stated that they have urged the US to exclude Japanese products from these new measuresFurthermore, new discussions pointed to possible tariffs on imported automobiles commencing April 2, raising concerns among the Japanese economic leadershipMinister Akira Amari stated that Japan will meticulously monitor any implications these "reciprocal tariffs" might have and react appropriately.

The Japanese government is committed to thwarting any tariff strategies that threaten critical facets of US-Japan trade

Advertisements

Advertisements

Advertisements