The Japanese economy experienced a slower-than-expected growth rate in the final quarter of 2024, with an annualized expansion of 2.2%, down from the initial estimate of 2.8%. This revised figure, released by the Cabinet Office, highlights underlying weaknesses in consumer spending and inventories. The Bank of Japan (BOJ) may now be more cautious about adjusting its monetary policies when policymakers meet next week. The yen briefly weakened following the announcement, reflecting market concerns over the economic outlook. Additionally, January's household spending data showed a significant shortfall, further indicating the impact of ongoing inflation on domestic demand. Analysts suggest that these factors could influence future policy decisions, particularly regarding gradual interest rate hikes.

The downward revision to Japan's fourth-quarter GDP underscores the fragility of the country's economic recovery. Despite net trade and business investment contributing positively to growth, private consumption remained stagnant. Economists point out that the drop in inventory levels played a major role in this weaker-than-expected performance. This situation is especially concerning given the growing risks posed by US trade policies under President Trump, which have already affected import volumes and could potentially harm exports if new tariffs are imposed.

In January, household spending increased by only 0.8% compared to the previous year, falling short of expectations. Consumers have been cutting back on discretionary purchases due to persistent inflation and declining real wages. Prime Minister Shigeru Ishiba's government has introduced several measures to alleviate price pressures, including releasing emergency rice stockpiles. However, the upcoming national election adds pressure to stabilize domestic demand as voter dissatisfaction over rising living costs could impact political stability.

Trade uncertainties loom large as the US administration considers imposing additional tariffs on various imports, including automobiles. Such actions could significantly affect Japan's export-dependent economy. Commerce Secretary Howard Lutnick indicated no reprieve for steel and aluminum tariffs set to take effect soon, while potential auto tariffs could further strain external demand starting April. These developments highlight the delicate balance the BOJ must maintain between supporting economic recovery and managing inflationary pressures.

The revised GDP figures reveal the challenges facing Japan's economic growth. While overall expansion continues at a moderate pace, the slowdown in consumer spending and trade uncertainties pose significant risks. Policymakers will need to carefully weigh these factors as they consider future adjustments to monetary policy. The coming months will be crucial in determining whether the current trajectory can be sustained amid global and domestic headwinds.