Japan revises fourth-quarter GDP lower, complicating BOJ’s interest rate outlook

Japan’s economic growth slowed to 2.2% on an annualized basis in the fourth quarter, complicating the central bank’s case for a near-term interest rate as the country grapples with tepid domestic demand.

The revised data came in lower than economists’ median forecast and the initial estimate of 2.8% growth.

On a quarter-to-quarter basis, GDP expanded 0.6%, compared with a 0.7% growth in preliminary data released last month, the Cabinet Office’s revised data showed on Tuesday.

The Bank of Japan is likely to keep policy rate steady at its next policy meeting on March 18-19, Reuters reported. Yet the rate-setting board could be discussing another rate hike for as soon as May, due to concerns about inflationary pressure from wage gains and stubborn rises in food costs.

Following the data release, Japan’s Nikkei 225 index fell over 2%. The Japanese yen strengthened 0.32% to trade at 146.77 against the greenback. The government 10-year bonds rose with yields shedding 3.7 basis points to 1.538%.

As the central bank sought to normalize its ultra-loose monetary policy last year, it has raised short-term interest rates by a quarter percentage to 0.5% in January — its highest level since the depth of global financial crisis in 2008.

Still, the upbeat GDP data “supports the view that rates will face heightened upward pressure as monetary policy tightens,” Sonal Desai, chief investment officer at Franklin Templeton Fixed Income, said in a client note.

“The BoJ is likely to hike at least twice more this year, but we are tilting to three,” Desai said, expecting the terminal rates to “well be above 1%.”

The so called “core-core” inflation rate, which strips out prices of both fresh food and energy and is closely monitored by the BOJ, climbed slightly to 2.5% in January, hitting its highest rate since March 2024.

Separate data from the internal affairs ministry on Monday showed household spending climbed 0.8% year on year in January, far below expectations for a 3.6% rise, according to a Reuters poll.

“Sticky inflation and lackluster pay growth will push real wage gains further into the distance and, with it, an improvement in domestic consumption,” said Stefan Angrick, head of Japan and frontier markets economics at Moody’s Analytics.

Capital expenditure, a barometer of private demand, was revised upward to 0.6% growth quarter-on-quarter in the October to December period, compared with a preliminary reading of a 0.5% rise.

Private consumption, which accounts for more than half of Japan’s economy, was flat in the revised reading, compared with 0.1% in the initial reading and the 0.7% rise in the previous quarter.

“The downward revision in consumer spending is a bit negative as data to support the BOJ’s rate hikes, but it is not likely to significantly change the assessment of the economy,” Masato Koike, economist at SOMPO Institute Plus said in a note.

The BOJ is slated to release the corporate goods price index for January on Wednesday, which measures prices of goods companies charge each other. The gauge is expected to show a 0.1% month-on-month decline, according to a Reuters poll, while jumping 4.0% from a year earlier.

— CNBC’s Lim Hui Jie contributed to this report.