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Japan’s economy showed impressive resilience in the fourth quarter of 2024, expanding at an annualized rate of 2.8%, marking the third consecutive quarter of strong growth. After experiencing contractions in two of the previous three quarters, this rebound was driven largely by robust export performance, particularly in goods and services, and a decline in imports. However, despite the headline growth, domestic demand showed signs of weakness, raising concerns for policymakers and the Bank of Japan (BOJ).

The Key Drivers of Growth

1. Strong Export Performance

A major factor behind Japan’s impressive GDP expansion was the surge in exports, which contributed significantly to overall growth. Two primary factors drove this export boom:

Goods Exports: The sharp rise in exports of goods suggests that manufacturers ramped up shipments, potentially in response to global trade uncertainties, including anticipated US tariffs.

Services Exports: Japan’s tourism sector witnessed a strong revival, with foreign visitors spending heavily, boosting service exports. The post-pandemic recovery in tourism has played a crucial role in supporting Japan’s economic momentum.


2. Decline in Imports

Imports dropped significantly, amplifying the positive net trade balance. This suggests that domestic demand for foreign goods weakened, either due to higher prices from currency fluctuations or a shift towards domestic production and consumption.

3. Capital Investment by Businesses

Japanese businesses increased capital investment, indicating confidence in future demand and economic stability. This is a promising sign for long-term economic health, as business investment fuels productivity and innovation.

4. Weak Consumer Spending

Despite strong growth in the previous quarter, household spending in Q4 2024 showed only modest gains. This sluggish domestic demand presents a concern, especially as Japan’s economic policies attempt to navigate inflationary pressures.

Concerns Over Domestic Demand and Inflation

While the strong GDP numbers are encouraging, the relative weakness of domestic demand is a concern. Japan’s high inflation, driven by rising food prices, has weighed on household consumption. In response, the government released rice stockpiles to stabilize food prices, highlighting concerns over the cost of living.

The BOJ’s monetary tightening—a departure from years of ultra-loose monetary policy—adds another layer of complexity. While the central bank aims to curb inflation, it must do so carefully to avoid further weakening consumer spending.

The Role of the Yen and Trade Policy Risks

Japan’s currency fluctuations played a significant role in shaping the economic landscape. Following the strong GDP report, the yen appreciated. However, the yen has been under downward pressure for months due to:

The US Federal Reserve’s tight monetary policy, which has strengthened the US dollar relative to the yen.

Trade tensions and tariff threats, which create uncertainty around future Japanese exports.


Tariff Threats and Export Frontloading

One of the most pressing concerns is the potential for US tariffs on Japanese goods, particularly automobiles—one of Japan’s key exports. Anticipating this risk, Japanese manufacturers may have frontloaded exports to the US, artificially boosting the latest trade figures.

In January 2025, Japan’s exports (measured in yen) surged by 7.2%, the strongest growth since mid-2024. While this growth is encouraging, it raises questions about sustainability if US trade policies become more protectionist under the new administration.

Japan’s Economic Outlook

Japan’s economy is at a critical juncture, with both opportunities and risks on the horizon:

Strength in exports could continue, particularly if global demand remains stable.

Business investment growth is a positive indicator of economic resilience.

Domestic demand remains fragile, with consumer spending showing only modest gains despite government efforts to stabilize inflation.


Policy Challenges for the BOJ and the Government

The Bank of Japan faces a delicate balancing act—tightening monetary policy to control inflation, while avoiding excessive pressure on domestic demand. Additionally, the government may need to provide fiscal support to maintain economic momentum, especially if global trade conditions worsen.

Japan’s strong economic performance in late 2024 is a testament to its export competitiveness and business resilience. However, the fragility of domestic demand and trade policy risks cannot be ignored. As Japan navigates 2025, policymakers will need to carefully manage inflation, currency fluctuations, and potential trade disruptions to sustain growth.

While the current export-driven recovery is welcome, a more balanced economic expansion—driven by both external and domestic factors—will be crucial for long-term stability.