TOKYO – Japan’s economy narrowly averted a recession at the end of 2022, barely growing in the fourth quarter on frail consumption, revised data showed on Thursday, underscoring the challenge for policymakers trying to shore up a stuttering recovery.

Record-high inflation and slowing global growth amid monetary tightening across many countries have undermined the world’s third-biggest economy’s post-pandemic revival, despite relaxation of Covid-19 curbs, energy subsidies and an ultra-easy monetary policy.

Businesses, under government pressure to increase wages to boost household consumption, are struggling to motor on in the face of muted demand.

Japan’s gross domestic product (GDP) expanded by an annualised 0.1 per cent in October to December, against a preliminary estimate of a 0.6 per cent expansion and much lower than economists’ median forecast for a 0.8 per cent rise in a Reuters poll. This followed a 0.8 per cent contraction in July to September.

The expansion translates into an almost flat 0.02 per cent quarter-on-quarter change, data released by the Cabinet Office showed, against a preliminary reading and estimate for a 0.2 per cent growth.

“There was a less strong recovery in service consumption, while rising inflation likely curbed it as well,” said an economist at Daiwa Institute of Research.

Private consumption, which makes up more than half of the country’s GDP, grew just 0.3 per cent, the data showed, downgraded from an initial estimate of a 0.5 per cent increase.

Capital spending fell 0.5 per cent, unchanged from a preliminary estimate and compared with a median market forecast for a 0.4 per cent contraction.

Domestic demand as a whole knocked 0.3 percentage point from revised GDP growth, slightly more than initially estimated, while net exports added 0.4 percentage point.

Japan’s economy is buffeted by slowing overseas demand due to deteriorating global growth, resulting in a record trade deficit and the largest factory output contraction in eight months in January.

Domestic demand is giving some support for the economy, thanks to the relaxation of Covid-19 curbs, including a border control easing for international tourists in October, but four-decade-high inflation is undercutting the prospects of a consumption-driven recovery.

To boost households’ purchasing power, the government and the Bank of Japan (BOJ) are urging firms to raise workers’ pay at the annual spring wage negotiations wrapping up in March.

Major companies are set to deliver the largest pay rise in 26 years, but it will likely include just a 1 per cent increase in base pay, casting doubt on whether Japan can achieve the kind of sustained wage gains the central bank sees as key to stably hitting its 2 per cent inflation target.

The BOJ is set to maintain its ultra-easy policy at the two-day rate review concluding on Friday, the last in governor Haruhiko Kuroda’s 10-year tenure.

The government is looking at additional measures to counter inflation, following a US$285 billion (S$385 billion) fiscal package unveiled in October that has subsidised petrol and utility costs.

But the weak GDP data and challenges overseas point to a bumpy road to recovery for Japan, analysts say.

“Japan’s October to December ended up as a zero-growth (quarter), bashing the hopes for a rebound from the July to September contraction,” said Mr Takeshi Minami, chief economist at Norinchukin Research Institute.

“The economy remains in a tough position from April onwards, with the heightening risk of stalling growth in Europe and North America on relentless monetary tightening.” REUTERS