Monday's release of Japan's preliminary GDP data for the fourth quarter (Q4) of the previous year revealed a 0.7% quarter-on-quarter increase, outstripping the Refinitiv consensus forecast of 0.3% and Capital Economics' estimate of 0.2%.

This jump followed an upward-revised 0.4% rise in Q3, leading to a 1.2% annual output rise—double the Bank of Japan's (BoJ) sustainable growth rate estimate.

The GDP growth was not broad-based, with private consumption inching up by 0.1%, non-residential investment climbing 0.5%, and public demand remaining unchanged.

A significant 0.7 percentage point contribution from net exports was the primary growth driver, largely due to a sharp 2.1% decline in import volumes rather than the 1.1% increase in export volumes.

Capital Economics analysts anticipate that Japan's GDP growth will decelerate towards the trend in the upcoming quarters, even as the output gap begins to narrow.

Despite this, they project a 1% increase in output for the current year, while acknowledging that the risks to this forecast lean towards the downside. This cautious outlook is partly based on the expectation that real household incomes may decline once more as income tax cuts are reversed.

While a high savings rate could potentially sustain consumption levels, there is a possibility that consumers may reduce spending in reaction to the drop in real incomes.