Japan’s economy grows 2.8% in Q4 as strong domestic demand fuels recovery

Japan’s economy expanded at an annualized 2.8% in the October-December quarter, surpassing market expectations, as robust capital spending and resilient consumer demand supported growth, government data showed on Monday.

The stronger-than-expected performance reinforces optimism about the country’s economic recovery, even as trade uncertainties persist.

The latest gross domestic product (GDP) figures outpaced a 1.0% growth estimate from a Reuters poll and followed a revised 1.7% expansion in the previous quarter. Quarterly, GDP grew 0.7%, beating forecasts of 0.3%.

Japan’s economy: domestic demand drives growth

Private consumption, which makes up more than half of Japan’s economy, rose 0.1%, defying projections of a 0.3% decline.

While wage growth and household spending have shown improvement, analysts remain cautious about inflationary pressures weighing on personal consumption.

Capital expenditure, a key driver of business investment, increased 0.5% in Q4, reversing a decline in the previous quarter but missing the 1.0% growth forecast.

Meanwhile, net external demand—the difference between exports and imports—contributed 0.7 percentage points to GDP, bouncing back from a negative impact in the July-September period.

BOJ’s policy outlook remains in focus

The stronger economic data may bolster the Bank of Japan’s (BOJ) plans to gradually tighten monetary policy.

The central bank has been closely monitoring consumption and wage trends to assess the economy’s strength and determine the timing of further interest rate hikes.

last week, Bank of Japan (BOJ) Governor Kazuo Ueda cautioned that persistently high food prices could influence inflation expectations, reinforcing the central bank’s careful approach to monetary policy.

“We are deeply aware that a rise of more than 2% in the prices of fresh foods and other everyday essentials is negatively impacting people’s lives,” Ueda told parliament.

He added that food price increases may not be temporary, posing risks to consumer sentiment and broader price expectations.

Ueda’s comments come after the BOJ raised short-term interest rates to 0.5% last month, marking the first hike in 17 years.

The move reflects policymakers’ confidence that Japan is transitioning toward sustainable, wage-driven inflation.

In December, Japan’s overall consumer price index (CPI) rose 3.6% year-over-year, significantly outpacing the 3.0% core CPI increase, which excludes volatile fresh food prices.

The jump was primarily driven by higher costs of fresh vegetables and rice. However, Ueda has previously suggested that cost-push inflationary pressures may ease by mid-year.

BOJ’s approach to interest rates and bond tapering

The BOJ evaluates inflation trends beyond short-term price fluctuations, focusing on underlying inflation that excludes volatile factors like fuel and fresh food prices.

Ueda reiterated that the pace of future rate hikes will depend on economic conditions, inflation trends, and financial stability.

Additionally, he confirmed that the BOJ will conduct a mid-term review in June on its current plan to scale back government bond purchases, with a new strategy set to take effect from April 2026.

Under a framework announced last July, the BOJ intends to halve its monthly Japanese government bond purchases to 3 trillion yen ($19.52 billion) by early 2026.

“Our bond-tapering plan is designed to be predictable yet flexible, ensuring market stability,” Ueda stated.

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