Japanese economy grew at slower-than-expected pace at end of 2013

Monday 17 February 2014 10.19
The Japanese economy grew by 0.3% in the fourth quarter - well below forecasts
The Japanese economy grew by 0.3% in the fourth quarter - well below forecasts

Japan's economy grew at a much slower pace than expected at the end of last year, as massive government stimulus efforts showed few signs of sparking momentum in consumption and exports.

The data showing disappointing private consumption, business investment and shipments came as the Bank of Japan met to review its ultra-easy policy.

Markets widely expect the central bank to hold firm to the current pace of bond-buying stimulus.

However, pressure is likely to mount on the BOJ and the government to do more in coming months, especially if a planned sales tax hike in April proves more damaging to growth than expected.

The Cabinet Office said that the economy grew 0.3% in the fourth quarter, well below the median estimate for a 0.7% increase and followed 0.3% growth in July-September.

It was the fourth successive quarter of growth, which is the best run for the world's third-largest economy in more than three years.

Economists still expect that growth will accelerate in the current quarter as shoppers buy more goods before the tax hike, but any further disappointments could increase the need for further fiscal and monetary stimulus.

"I am not so concerned about domestic demand given a buying rush ahead of a sales tax hike in April will play out more strongly in the current quarter," said  Taro Saito, senior economist at NLI Research Institute.

"What's more worrying is sluggish exports despite long-expected impact of a weak yen on boosting external demand."

Export growth has remained sluggish over recent quarters, partly reflecting softer demand in Asian markets though some of it also underlined the shift by Japanese companies of their manufacturing plants to offshore centres.

The weak external sector is a worry for Japan especially as the initial burst of momentum created by Prime Minister Shinzo Abe's unprecedented monetary and fiscal expansionary policies start to fade.

After decades of lacklustre growth, during which time China overtook Japan as the world's second-biggest economy, Abe swept to power in December 2012 with a bold plan to end deflation and strengthen economic reforms.

His policies, dubbed Abenomics, helped Japan's economy speed past many of its Group of seven counterparts in the first half of last year, but the latest data will raise doubts about Abe's strategy.

Japan's benchmark Nikkei 225 stock average opened higher but then fell 0.4% as the slower-than-expected growth weighed on sentiment. It has since rebounded 0.3%.

On an annualised basis, Japan's economy grew 1%, below the median estimate for a 2.8% rise and 3.2% annualised growth in the United States in the same quarter, the Cabinet Office data showed.

Capital expenditure, a weak link in Japan's rebound so far, rose 1.3% in October-December. This marked the quickest rowth in two years but was still less than the median forecast for a 1.9% gain.

The data adds to recent signs of slackening momentum in the economy, including from a closely-watched leading indicator of capital expenditure that suggests companies could turn more cautious this year due to worries about consumer spending.

In the fourth quarter private consumption, which makes up about 60% of the economy, grew 0.5% from the third quarter.

That was less that the median estimate for 0.7% in October-December, suggesting that a spurt in demand ahead of the sales tax hike is not as strong as anticipated.

The government will increase the sales tax in April to 8% from 5%, and consumers have been buying cars, homes and durable goods before the tax increase.

Some companies have indicated they are willing to raise salaries during annual wage negotiations with labour unions held in the spring, which is an important barometer of whether Abe's economic policies are working.

Still, some economists worry wage gains will not be strong enough to support consumer spending after the tax hike takes effect.