Japan's economy shows divided growth as small firms struggle

Japan's economy expanded at an annualized real rate of 0.2% in the October-December period, marking the first growth in two quarters. The uptick was supported by a modest increase in personal consumption, despite ongoing inflation. However, exports weakened, partly due to higher U.S. tariffs that affected auto shipments.

Despite the overall economic growth and a booming stock market, with the Nikkei Stock Average surpassing 70,000, many small businesses are struggling. Yasuhisa Hirohama, representing such firms, noted an "enormous gap" between market performance and the reality faced by smaller companies, which are squeezed by inflation and weak pricing power.

The Bank of Japan (BoJ) has signaled confidence in the economy's ability to absorb further policy normalization. The central bank raised its policy rate to a 31-year high of 1% in June and anticipates at least one more quarter-point hike this year, contingent on inflation, wage, and activity data, as well as the impact of yen weakness.

Core inflation, a key measure for the BoJ, remains above its 2% target, even as headline inflation has fallen below target due to government measures like food-price controls. The BoJ is monitoring signs of price pass-through from higher crude oil prices and potential broader consumer price increases.