Japan's GDP has expanded for three consecutive quarters, expectations for interest rate hikes have soared, and the 10-year Japanese government bond yield once hit a 15-year high

Benefiting from corporate investment and net export growth, Japan's GDP has expanded for the third consecutive quarter, providing support for further interest rate hikes by the Bank of Japan.

On Monday, February 17, the latest data released by Japan's Cabinet Office showed that Japan's economic performance in the fourth quarter of 2024 exceeded market expectations, with a seasonally adjusted annualized GDP growth rate of 2.8%, significantly higher than the market's general expectation of 1.1%, and also surpassing the revised figure of 1.7% from the previous quarter. Among them:

Private consumption grew by 0.1%, higher than the expected -0.3%; corporate investment grew by 0.5%, lower than the expected 0.9%; net exports grew by 0.7%, higher than the expected 0.4%.

Despite the overall good economic performance, the report also showed some signs of weakness. On one hand, the growth in net exports was partly due to a decline in imports, raising concerns in the market about the health of domestic demand in Japan.

On the other hand, although private consumption rose slightly and exceeded expectations, the growth rate has clearly slowed compared to the previous quarter. Additionally, from an annual perspective, total private consumption in 2024 is below levels seen a decade ago, reflecting the ongoing pressure of inflation on consumption.

However, Yuichi Kodama, an economist at Meiji Yasuda Life Research Institute, stated:

“Although inflation is putting pressure on consumption, the overall economy is still growing, so the Bank of Japan may continue to gradually raise interest rates as planned.”

Currently, economists expect the Bank of Japan to raise interest rates again this summer. Overnight index swaps indicate that the market believes there is over an 80% chance of a rate hike by the Bank of Japan before July, and a rate hike before September has been fully priced in.

In terms of policy, Prime Minister Shigeru Ishiba is seeking to address the impact of inflation through a package of economic stimulus measures. According to media reports, as Ishiba's minority government is negotiating with smaller opposition parties on measures such as increasing the income tax exemption threshold and free high school tuition, more voter-friendly policies may be introduced in the future.

It is worth noting that despite the strong performance in the fourth quarter, Japan's GDP for the entire year of 2024 grew by only 0.1%, marking the weakest growth rate since the pandemic. Meanwhile, due to the weak yen, Japan's position in the global economy has declined, currently ranking fourth in the world.

As Japan's economy continues to recover, market sentiment towards the yen is also warming. Data from the U.S. Commodity Futures Trading Commission shows that as of the week ending February 11, asset management companies' net long positions in the yen reached the highest level in nearly four years. So far this year, the yen has been the best-performing currency against the dollar among G10 currencies.

After the GDP data was released today, the USD/JPY exchange rate fell by 0.47%, currently reported at 151.58.

The yield on Japan's 10-year government bonds briefly rose to 1.375%, the highest level since 2010.