TOKYO – Japan’s economy avoided falling into a recession at the end of 2023, helped by robust spending by businesses, an outcome that improves the optics for the central bank as it mulls the timing of its first interest rate hike since 2007.

Gross domestic product expanded at an annualised pace of 0.4 per cent in the final three months of 2023, the Cabinet Office reported on March 11, reversing a 0.4 per cent retreat initially reported.

While the upwardly revised data pointed to more resilience in the economy than initially thought ahead of next week’s Bank of Japan (BOJ) policy meeting, the figures also showed that consumers were continuing to spend less in real terms as inflation weighed.

Economists had forecast that the updated report would show 1.1 per cent growth.

The yen and bond yields rose on notions that the BOJ is edging closer to ending the world’s last negative interest rate, with market expectations ramping up for a move as early as March.

March 11’s data supports BOJ’s view that the economy continues to recover moderately, with companies optimistic enough to bump up investment and workers’ pay. Corporate capital investment was revised to a 2 per cent advance, powering growth in the last quarter. Consumer spending, on the other hand, was revised to show a slightly deeper decline at 0.3 per cent.

The weak spending data probably will not deter the BOJ from making a move, according to Mr Takashi Miwa, senior economist at Nomura Securities.

“The BOJ’s outlook reports in October and January suggested that the bank wasn’t too concerned about a decline in spending,” said Mr Miwa.

The bank has “consistently assessed that the virtuous cycle between wages and price is strengthening”, and the GDP data probably will not change that view, he said.

Mr Nobuyasu Atago, chief economist at Rakuten Securities Economic Research Institute, said the figures are weaker than expected, with domestic demand hit by rising prices. Still, he expects the BOJ to make a policy move in March.

“If they don’t move in March even with strong results from the wage talks, that could send the yen lower and risk damaging consumers further with higher import costs,” Mr Atago said. “It’s a big dilemma for the BOJ to wait until April.”

A majority of economists expects the BOJ to scrap the negative interest rate with its first hike since 2007 in March or April. Encouraging signs of wage growth in 2024 have increased bets on the rate hike coming on March 19, when the central bank concludes its next policy meeting.

Inflation has continued to outpace wage gains in 2024, putting a burden on household budgets and crimping outlays. Early data indicates that the weakness is carrying over into 2024. Household spending declined by 6.3 per cent in January from a year earlier, the biggest drop since February 2021.

The yen initially extended gains after the data before retracing that move, while volatile overnight swaps that signal rate expectations showed a 65 per cent chance of the BOJ hiking in March, also largely unmoved. Yields on benchmark government bonds continued to rise.

The focus is now on annual pay negotiations between companies and labour unions, which will culminate with results from the biggest union group, Rengo, on March 15, the last business day before the BOJ starts its two-day gathering.

The constituents of the union federation have demanded on average the biggest pay hike since 1993, at 5.85 per cent, compared with demands for a 4.49 per cent increase a year ago. 

BOJ governor Kazuo Ueda has repeatedly cited the importance of the wage negotiations as a catalyst for a virtuous wage-price cycle that will signal its price goal is achieved, and enable the bank to normalise its policy settings. Central bank board member Hajime Takata said the price target is “finally” coming into sight, boosting market bets on a March move.

Japanese Prime Minister Fumio Kishida is monitoring trends in consumption and wages as a key to judging whether the country has finally overcome deflation. He reportedly plans to meet business leaders and union leaders this week for a final push. 

The approval rating for Mr Kishida’s government fell 4.4 percentage points to a fresh low of 20.1 per cent in a Kyodo News survey published on March 10.

The BOJ’s window for normalising policy may not stay open for too much longer, Mr Atago said. “The longer they wait, the harder it will become for them to end the negative rate.” BLOOMBERG