Trump’s Trade Policies Impact Japan’s Economic Growth

• Japan’s GDP growth slowed to 0.1% in 2024, down from 1.5% in the previous year.
• The last quarter of 2024 saw a growth acceleration to 0.7%, more than double the market expectations.
• Despite the slowdown, positive factors include normalization of motor vehicle production and strong capital expenditure spending.
• The Bank of Japan raised interest rates in response to these economic conditions, signaling a move away from policies designed to counter economic stagnation.

Japan’s economy experienced a significant slowdown in growth in 2024, despite a stronger performance in the fourth quarter, according to official data released on Monday. The world’s fourth-largest economy saw its Gross Domestic Product (GDP) expand by a mere 0.1% in 2024, a sharp decline from the 1.5% growth recorded in the previous year. This slowdown comes amidst concerns from Japanese companies over the potential impact of U.S. President Donald Trump’s protectionist trade policies, including import tariffs.

Trump’s Trade Policies and Japan’s Economy

The President announced last week his plans to unveil tariffs on imported cars from around April 2, adding to a series of levies he has threatened since taking office. However, the last quarter of 2024 brought some positive news. Quarter-on-quarter growth accelerated to 0.7%, up from 0.4% in the July-September period, which was affected by a megaquake alert and one of the fiercest typhoons in decades. This fourth-quarter figure was more than double the market expectations of 0.3% growth.

Stefan Angrick of Moody’s Analytics commented on the situation, stating, On the surface, Japanese GDP growth in the final stretch of 2024 looks like a turning point. However, he cautioned against premature celebration, noting that Japan’s preliminary GDP figures are notoriously choppy and subject to sizable revisions. Angrick further highlighted that the seemingly positive headline figure masks a domestic economy that is still struggling. Consumption is weak as pay gains have trailed inflation for the better part of three years, he said.

Positive Factors Amidst the Slowdown

Despite the overall slowdown, there were some positive factors identified. The Daiwa Institute of Research noted various growth factors, including the normalization of production for motor vehicles. The institute also pointed to a strong appetite for capital expenditure (capex) spending on the part of corporations and a comeback for inbound consumption. In the global economic landscape, Japan’s position has also shifted. Last year, Germany overtook Japan as the world’s third-biggest economy, with projections indicating that India is set to leapfrog both later this decade. This change in positions primarily reflected the sharp fall in the yen against the dollar, according to analysts.

Bank of Japan’s Response to Economic Conditions

In response to these economic conditions, the Bank of Japan (BoJ) took action. In January, the bank raised interest rates again, having done so in March for the first time in 17 years, and signaled more hikes to come. This move, which left borrowing costs at the highest since 2008, was also underpinned by steadily rising wages and financial markets being stable on the whole, according to the bank. The BoJ had remained an outlier even as other central banks raised borrowing costs in recent years. However, it finally lifted rates above zero in March, signaling a move away from policies designed to counter Japan’s lost decades of economic stagnation and static or falling prices.