In a surprising turn of events, Japan's economy has shown stronger-than-expected performance over the past yearThe initial statistics released by the Cabinet Office of Japan on February 17 reveal a modest increase of 0.1% in the actual Gross Domestic Product (GDP) for 2024, a decline from the 1.5% growth witnessed in 2023.

The quarterly figures unveiled on the same day indicated a 0.7% quarter-on-quarter growth in Japan's actual GDP in the fourth quarter of last yearWhen annualized, this translates to a remarkable growth rate of 2.8%. These figures significantly surpassed market expectations of a mere 1.1% growth, in addition to exceeding the previously revised growth rate of 1.7% from the previous quarterConsequently, Japan has recorded positive GDP growth for three consecutive quarters.

The data disclosed concurrently also highlighted an important milestone: Japan's nominal GDP has crossed the 600 trillion yen threshold for the first time, reaching 609 trillion yen (approximately $4.05 trillion), with a nominal growth rate year-on-year of 2.9%. This marks four consecutive years of growthNevertheless, it is essential to note that despite this achievement, Japan has dropped to the world’s fourth-largest economy, lagging behind Germany's 2024 preliminary figure of $4.52 trillion.

According to Professor Chen Zilei, the President of the Society for Japanese Studies in Shanghai and Director of the Japan Economic Research Center at the Shanghai University of International Business and Economics, the positive growth in Japan's GDP in the last quarter was crucial to avoid an overall negative trend for the yearHe notes, "The 0.1% growth has slightly reflected the effect of salary increases in Japanese companies, but fundamentally, the Japanese economy is still largely driven by external demand, with domestic consumption remaining somewhat weak."

Senior Bloomberg economist Taro Kimura explained that net exports, calculated as exports minus imports, have been a vital driver of economic growth

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This growth is fueled by robust foreign demand as well as a decrease in imports, while stable investment and consumption levels indicate that the central bank's interest rate hikes have not adversely affected the momentum in the private sector.

Japan’s Minister of Economic Recovery, Akizumi Yoshihiro, expressed optimism in a statement, predicting that the Japanese economy should continue on a path of gradual recovery.

However, the impressive statistics overshadow a more complex realityAccording to Xinhua News Agency, the specific data from the Cabinet Office indicates that domestic demand contributed only 0.2 percentage points to Japan's economic growth in 2024. Private investment in equipment saw a minimal increase of 1.2%, while public demand rose by 0.5%. Yet, the reality is stark; due to inflation outpacing wage growth, real income for the populace has decreased, leading to a drop in personal consumption—representing over half of Japan’s economy—by 0.1%, marking the first negative growth in four years.

Additionally, private residential investment fell by 2.3%. Overall, external demand's contribution to economic growth was notably poor at -0.1 percentage pointsFor 2024, Japan's export of goods and services grew by 1.0%, whereas imports increased by 1.3%.

Chen Zilei pointed out that despite slight increases in personal consumption and equipment investment last year, the data fails to reflect the economic vitality adequately, especially with imports declining for three consecutive quarters, underscoring the inadequacy of domestic demand.

He also highlighted that the depreciation of the yen against the dollar last year was a significant factor, as the exchange rate dipped to a historic low of 161 yen per dollar at one point. "If we factor exchange rates into consideration, Japan's net external demand hardly saw any growth last year, mostly influenced by the dollar's appreciation," he noted.

Throughout 2024, the yen experienced notable fluctuations in the foreign exchange market, initially beginning the year at around 140 yen per dollar, then plummeting to the low of 161, before rebounding to approximately 139 in September, only to fall back into the range of 150 yen per dollar by year's end.

Reflecting on the nominal GDP scale achieved by Japan last year, Chen emphasized that back in 2015, then-Prime Minister Shinzo Abe had set a goal for Japan to surpass 600 trillion yen by 2020—a target that has only recently been realized, albeit four years late.

Historically, Japan’s nominal GDP has been increasing by about 100 trillion yen every five years since 1973. After breaking the 500 trillion yen mark in 1992, it entered a prolonged stagnation period

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The recent achievement in crossing the 600 trillion yen benchmark is noteworthy, yet it comes with caveats.

Despite the nominal figure surpassing 600 trillion yen, Chen underlined the importance of considering exchange ratesThe 2015 exchange rate was approximately 120 yen to the dollar, while in 2024, it hovers between 150 to 160. "If we calculate based on the dollar, Japan's nominal GDP in 2015 approximated $5 trillion, and now, it stands at about $3.75 trillion to $4 trillionTherefore, from a dollar perspective, while Japan claims a nominal GDP exceeding 600 trillion yen, it has significantly diminished in relative terms."

In summary, while the latest economic data presented by Japan boasts attractive statistics, Chen stresses that the underlying reality is far less appealingEspecially when factoring in the exchange rates, the current landscape of Japan's economy remains dauntingTo a great extent, the role played by personal consumption—representing over half of Japan's GDP—on economic growth is gradually waning, and the support from domestic demand and equipment investment is still insufficient.

Dual pressures from tariffs and inflation also complicate the outlook for Japan's economy this yearChen remains cautious, stating that there are still hidden concerns, predicting that the probability of negative growth this year is relatively high. "On one hand, the prices of essential goods in Japan remain elevatedThe inflation rate is outpacing the income growth of average citizens, consequently increasing their financial burden," he explained. "On the other hand, if Japan's vital export sector faces tariff pressures from the new U.S. presidential administration, maintaining positive growth will become even more challenging."

Regarding the recently announced 25% tariff on all steel and aluminum imports to the U.S., Japanese Chief Cabinet Secretary Hiroshi Matsuno has already raised requests to the U.S. for exemption of Japanese products from these tariffs

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Furthermore, in a later statement, the U.SPresident indicated potential tariffs on imported vehicles effective from April 2. Japanese Minister of Economic Revitalization Akizumi Yoshihiro recently stated that Japan is closely monitoring the details and potential impacts of such "reciprocal tariffs" and will respond appropriately.

According to Chen, the Japanese government will undoubtedly exert every effort to prevent the U.S. from wielding tariff impositions in key trade sectors. "The 'Sword of Damocles' still hangs overhead; this year, Japan’s economy must navigate through numerous uncertainties to sustain its growth," he cautioned.

As for the outlook on interest rate hikes by the Bank of Japan this year, Chen observed that the central bank's policy implementation has been conventional given the current inflationary landscape in Japan. "Raising interest rates could help the Bank of Japan distance itself from previous unconventional monetary policies and pivot towards a more standardized rate management system; it is apparent that the Bank of Japan has been advancing in this direction." In January, the Bank of Japan decided to raise the policy rate to 0.5%, marking its first hike in nearly six months, and is perceived as a crucial step to counter inflation and promote economic growth.

Kimura opined that the accelerated economic growth in Japan during the last quarter was an indication of sufficient robustness in the economy, validating the central bank's decision to reduce stimulus measures further. "For the Bank of Japan, the compelling GDP data substantiates the decision made in January to resume rate hikes, which should bolster confidence in future adjustments," he added, suggesting that Bloomberg continues to anticipate two more rate hikes in April and July, aiming for a short-term rate adjustment to approximately 1%.

However, Chen believes that under the current circumstances, the Bank of Japan is unlikely to rush into further rate increases, instead opting for a period of observation to adequately assess both internal and external environments

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