(Bloomberg) — Japan’s economy avoided falling into a recession at the end of last year, 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 annualized pace of 0.4% in the final three months of last year, the Cabinet Office said Monday, reversing a 0.4% retreat initially reported. While the upwardly revised data point to more resilience in the economy than initially thought ahead of next week’s Bank of Japan policy meeting, the figures also showed that consumers are continuing to spend less in real terms as inflation weighs.
Economists had forecast the updated figures would show growth of 1.1%.
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 this month.
Monday’s data support the 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% advance, powering growth last quarter. Consumer spending, on the other hand, was revised to show a slightly deeper decline at 0.3%.
The weak spending data probably won’t deter the BOJ from making a move, according to Takashi Miwa, senior economist at Nomura Securities Co.
“The BOJ’s outlook reports in October and January suggested that the bank wasn’t to too concerned about a decline in spending,” Miwa said. “The bank has consistently assessed that the virtuous cycle between wages and price is strengthening,” and the GDP data probably won’t change that view.
Nobuyasu Atago, chief economist at Rakuten Securities Economic Research Institute, said the figures were weaker than expected, with domestic demand hit by rising prices. Still, he expects the BOJ to make a policy move this month.
“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,” 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 in March or April. Encouraging signs of wage growth this year have increased bets on the rate hike coming on March 19, when the bank concludes its next policy meeting.
Inflation has continued to outpace wage gains this year, putting a burden on household budgets and crimping outlays. Early data indicate the weakness is carrying over into 2024. Household spending declined by 6.3% in January from a year earlier, the biggest drop since February of 2021.
The yen initially extended gains after the data before retracing that move, while volatile overnight swaps that signal rate expectations showed a 65% change 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 labor 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%, compared with demands for a 4.49% 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 would signal its price goal is achieved, and enable the bank to normalize its policy settings. Board member Hajime Takata said the price target is “finally” coming into sight, boosting market bets on a March move.
What Bloomberg Economics Says…
“All in all, the GDP report depicts an economy that’s probably not strong enough to convince the Bank of Japan that it’s safe to end its negative interest rate policy at next week’s meeting.”
— Taro Kimura, economist
For the full report, click here.
Prime Minister Fumio Kishida is monitoring trends in consumption and wages as a key to judging whether the country has finally overcome deflation. The premier reportedly plans to meet with business leaders and union leaders this week for a final push.
The approval rating for Kishida’s government fell 4.4 percentage points to a fresh low of 20.1% in a Kyodo News survey published Sunday.
The BOJ’s window for normalizing policy may not stay open for too much longer, Atago said. “The longer they wait, the harder it will become for them to end the negative rate.”
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
OTTAWA – Canada’s inflation rate fell to two per cent last month, finally hitting the Bank of Canada’s target after a tumultuous battle with skyrocketing price growth.
The annual inflation rate fell from 2.5 per cent in July to reach the lowest level since February 2021.
Statistics Canada’s consumer price index report on Tuesday attributed the slowdown in part to lower gasoline prices.
Clothing and footwear prices also decreased on a month-over-month basis, marking the first decline in the month of August since 1971 as retailers offered larger discounts to entice shoppers amid slowing demand.
The Bank of Canada’s preferred core measures of inflation, which strip out volatility in prices, also edged down in August.
The marked slowdown in price growth last month was steeper than the 2.1 per cent annual increase forecasters were expecting ahead of Tuesday’s release and will likely spark speculation of a larger interest rate cut next month from the Bank of Canada.
“Inflation remains unthreatening and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate,” wrote CIBC senior economist Andrew Grantham.
Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO, said Tuesday’s figures “tilt the scales” slightly in favour of more aggressive cuts, though he noted the Bank of Canada will have one more inflation reading before its October rate announcement.
“If we get another big downside surprise, calls for a 50 basis-point cut will only grow louder,” wrote Reitzes in a client note.
The central bank began rapidly hiking interest rates in March 2022 in response to runaway inflation, which peaked at a whopping 8.1 per cent that summer.
The central bank increased its key lending rate to five per cent and held it at that level until June 2024, when it delivered its first rate cut in four years.
A combination of recovered global supply chains and high interest rates have helped cool price growth in Canada and around the world.
Bank of Canada governor Tiff Macklem recently signalled that the central bank is ready to increase the size of its interest rate cuts, if inflation or the economy slow by more than expected.
Its key lending rate currently stands at 4.25 per cent.
CIBC is forecasting the central bank will cut its key rate by two percentage points between now and the middle of next year.
The U.S. Federal Reserve is also expected on Wednesday to deliver its first interest rate cut in four years.
This report by The Canadian Press was first published Sept. 17, 2024.
FREDERICTON – New Brunswick‘s finance minister says the province recorded a surplus of $500.8 million for the fiscal year that ended in March.
Ernie Steeves says the amount — more than 10 times higher than the province’s original $40.3-million budget projection for the 2023-24 fiscal year — was largely the result of a strong economy and population growth.
The report of a big surplus comes as the province prepares for an election campaign, which will officially start on Thursday and end with a vote on Oct. 21.
Steeves says growth of the surplus was fed by revenue from the Harmonized Sales Tax and federal money, especially for health-care funding.
Progressive Conservative Premier Blaine Higgs has promised to reduce the HST by two percentage points to 13 per cent if the party is elected to govern next month.
Meanwhile, the province’s net debt, according to the audited consolidated financial statements, has dropped from $12.3 billion in 2022-23 to $11.8 billion in the most recent fiscal year.
Liberal critic René Legacy says having a stronger balance sheet does not eliminate issues in health care, housing and education.
This report by The Canadian Press was first published Sept. 16, 2024.
