TOKYO (Reuters) - Japan’s economy grew at a much slower pace than expected at the end of last year, posing a challenge to policymakers as massive government stimulus efforts showed few signs of sparking momentum in consumption and exports.
The data showing disappointing private consumption, business investment and shipments came as the Bank of Japan met to review its ultra-easy policy, with markets widely expecting the central bank to hold firm to the current pace of bond-buying stimulus.
However, pressure is likely to mount on the BOJ and the government to do more in coming months, especially if a planned sales tax hike in April proves more damaging to growth than expected.
The Cabinet Office said on Monday that the economy grew 0.3 percent in the fourth quarter, well below the median estimate for a 0.7 percent increase and followed 0.3 percent growth in July-September.
It was the fourth successive quarter of growth, which is the best run for the world’s third-largest economy in more than three years.
Economists still expect that growth will accelerate in the current quarter as shoppers buy more goods before the tax hike, but any further disappointments could increase the need for further fiscal and monetary stimulus.
“I am not so concerned about domestic demand given a buying rush ahead of a sales tax hike in April will play out more strongly in the current quarter,” said Taro Saito, senior economist at NLI Research Institute.
“What’s more worrying is sluggish exports despite long-expected impact of a weak yen on boosting external demand.”
Export growth has remained sluggish over recent quarters, partly reflecting softer demand in Asian markets though some of it also underlined the shift by Japanese companies of their manufacturing plants to offshore centers.
The weak external sector is a worry for Japan especially as the initial burst of momentum created by Prime Minister Shinzo Abe’s unprecedented monetary and fiscal expansionary policies start to fade.
After decades of lackluster growth, during which time China overtook Japan as the world’s second-biggest economy, Abe swept to power in December 2012 with a bold plan to end deflation and strengthen economic reforms.
His policies, dubbed Abenomics, helped Japan’s economy speed past many of its Group of seven counterparts in the first half of last year, but the latest data will raise doubts about Abe’s strategy.
Japan's benchmark Nikkei 225 stock average .N225 opened higher but then fell 0.4 percent as the slower-than-expected growth weighed on sentiment. It has since rebounded 0.3 percent.
On an annualized basis, Japan’s economy grew 1.0 percent, below the median estimate for a 2.8 percent rise and 3.2 percent annualized growth in the United States in the same quarter, the Cabinet Office data showed.
Capital expenditure, a weak link in Japan’s rebound so far, rose 1.3 percent in October-December. This marked the quickest growth in two years but was still less than the median forecast for a 1.9 percent gain.
The data adds to recent signs of slackening momentum in the economy, including from a closely-watched leading indicator of capital expenditure that suggests companies could turn more cautious this year due to worries about consumer spending.
In the fourth quarter private consumption, which makes up about 60 percent of the economy, grew 0.5 percent from the third quarter.
That was less that the median estimate for 0.7 percent in October-December, suggesting that a spurt in demand ahead of the sales tax hike is not as strong as anticipated.
The government will increase the sales tax in April to 8 percent from 5 percent, and consumers have been buying cars, homes and durable goods before the tax increase.
Some companies have indicated they are willing to raise salaries during annual wage negotiations with labor unions held in the spring, which is an important barometer of whether Abe’s economic policies are working.
Still, some economists worry wage gains will not be strong enough to support consumer spending after the tax hike takes effect.
“Optimists say the last time the sales tax was raised in 1997, consumption stumbled not because of the tax hike but because of a financial crisis,” said Takumi Tsunoda, senior economist at Shinkin Central Bank Research Institute.
“But at that time, wages were growing 1.5 percent. Today wages are up just 0.4 percent. So the negative impact on consumers’ real purchasing power will be bigger this time.”
External demand subtracted 0.5 percentage point from growth, versus the median estimate for a 0.4 percentage point subtraction. The negative contribution is due partly to Japan’s expanding domestic demand, which is boosting imports.
However, some economists worry that net exports could subtract from growth this year as companies continue to look for low-cost places outside of Japan to produce their goods, which means they ship less from Japan.
Recent turmoil in emerging markets, have also raised concerns about an external shock harming shipments.
BOJ Governor Haruhiko Kuroda has dismissed the need for additional monetary easing as consumer prices are headed toward its 2 percent inflation target and as overseas economies recover.
At its policy review on Tuesday the BOJ is widely expected to maintain its commitment of increasing base money at an annual pace of 60-70 trillion yen ($585-$683 billion) — the world’s biggest money-printer after the U.S. Federal Reserve started to trim back its own stimulus program since January.
Editing by Shri Navaratnam