GDP growth in the world’s third-largest economy slowed in Q4, keeping with the initial estimate. It nevertheless grew for eight consecutive quarters, the longest streak since a 12-quarter expansion ended in 1989, the period of Japan’s economic bubble.

Into the Headlines

Japan’s economy grew at an annualized 0.5% in Q4 compared with 2.2% in the prior quarter. The rate of growth was below a median estimate of 0.9%, per Cabinet Office data. Bank of Japan’s easy money policies and prime minister Shinzo Abe’s stimulus measures are driving economic growth.

Coming to the other drivers of economic growth, accounting for two-thirds of GDP, private consumption grew 0.5% compared with a contraction of 0.6% in the previous quarter and also surpassed expectations of 0.4% increase. Moreover, capital expenditure rose 0.7% sequentially in the quarter compared with analyst expectations of a 1.1% increase. Capital expenditure grew for the fifth straight quarter, driving optimism on higher business investment.

From a trade perspective, Japan’s net trade balance negatively impacted GDP to a certain extent, as exports grew 2.4% in the quarter compared with a 2.9% increase in imports owing to strong domestic demand. However, solid demand across the globe has been a positive for Japan’s trade.

Moving on to manufacturing, Japan’s manufacturing activity in January expanded at its fastest pace in almost four years, per the Nikkei Japan Manufacturing Purchasing Managers Index (PMI). PMI increased to 54.8 in January compared with 54.0 last December. The index remained above the 50 threshold that separates contraction from expansion for the 17th consecutive month.

Economic Scenario and Risks Involved

A stronger yen is a negative for manufacturers, as it diminishes the appeal of Japanese products to foreigners and leads to a fall in exports. Thus, the recent strength in yen has been weighing on Japanese stocks. For instance, CurrencyShares Japanese Yen Trust (FXY – Free Report) increased 1.5% in the past five days. However, the expected strengthening of the greenback might weigh on yen in the near future.