Japan narrowly exits recession

Japan came out of recession in the fourth quarter of 2014, but grew at a slower-than-expected pace. The country's economy grew by 0.6 per cent in the three months to December, reaching an annualised growth of 2.2 per cent. This is below analysts forecasts of a 3.7 per cent increase.

After the release of the data, Japan's Nikkei 225 index soared 0.5 per cent to close above 18,000, its highest level since July 2007.

Japan has been recovering from a sales tax hike, which dampened spending. The contraction in its economy during the third quarter of 2014 took market by surprise, shrinking 0.5 per cent on a quarterly basis, compared with an initial estimate of 0.4 per cent.

Analysts blamed a surprise decline in business investment, a big fall in business spending and a sales tax increase from five to eight per cent in April for the economy's plunge into a deeper recession.

Abenomics

The weak data had led prime minister Shinzo Abe to call a snap election with a view to delaying an increase in the sales tax to ten per cent, scheduled for 2015.

Critics have been vocal about the failure of "Abenomics", which combines aggressive monetary expansion, fiscal stimulus and structural reforms designed to revive the economy and end years of stagnation. The fourth quarter figures should bring some relief to Shinzo Abe.

Private consumption, which accounts for about 60 per cent of the economy, increased 0.3 per cent in the fourth quarter, less than the 0.7 per cent rise expected by economists.

Glenn Levine, senior economist at Moody's Analytics told the BBC exports "added solidly" to economic growth, accounting for about half of the expansion, while the rest of the economy remained relatively subdued. Exports rose 2.7 per cent in the fourth quarter compared to the third quarter, while imports were up 1.3 per cent.

However, the figures highlighted a weak increase in business investment. "Japan's corporate sector is enjoying record profit levels and sits atop a mountain of cash, with export-facing firms, in particular, benefiting from better export sales linked to the cheaper yen," Mr Levine of Moody's said. "Yet, so far firms have been reluctant to deploy any of this cash and invest in additional capacity."

This "issue of confidence" shows that firms do not believe that the domestic economy is improving, which is a reflection of whether Prime Minister Abe's economic policies termed "Abenomics" are succeeding, he said.