Japan’s Economy Contracts Less Than Expected in Q1, Boosting Hopes

Japan’s economy contracted less than initially reported in the first quarter of 2024, with upward revisions to capital spending and inventory data providing modest support for the central bank’s plans to raise interest rates again this year.

Revised GDP Figures:

The Cabinet Office data released on Monday showed Japan’s GDP shrank at an annualized rate of 1.8% from January to March, an improvement from the preliminary estimate of a 2.0% decline and economists’ median forecast of a 1.9% contraction.

In price-adjusted terms, this translates to a quarter-on-quarter contraction of 0.5%, unchanged from last month’s initial reading.

Economic Analysis and Outlook:

Analysts, including Kohei Okazaki, senior economist at Nomura Securities, suggest that the revised GDP figures could bolster the Bank of Japan’s (BOJ) confidence in future rate hikes.

Okazaki noted, “The revised GDP results made it easier for the BOJ to feel encouraged about future rate hikes as it can assess capital investment is picking up even a little bit.”

Despite this positive revision, Japan’s economic outlook remains uncertain due to a persistently weak yen and ongoing disruptions at major automaker plants.

Nonetheless, analysts expect the Japanese economy to have bottomed out in the first quarter, with potential for recovery ahead.

BOJ’s Policy Implications:

The revised GDP data comes amid speculation that the BOJ may discuss reducing its Japanese government bond (JGB) purchases during its upcoming policy review, as part of efforts to unwind monetary stimulus and curb yen weakening.

Investors are keenly watching for signals on the timing of further rate hikes by the central bank. The bank raised rates in March for the first time since 2007, marking a significant shift away from its ultra-loose monetary policy.

Capital Spending and Private Consumption:

Capital spending improved in the latter half of the fiscal year ending March 2024, providing some relief regarding current economic conditions. However, Okazaki cautioned about the future outlook, stating, “Current capex conditions are a relief, but we must be cautious about the outlook.”

Private consumption, accounting for more than half of Japan’s economy, fell by 0.7% in the first quarter, unchanged from the preliminary estimate. This marked the fourth consecutive quarter of decline, attributed to rising living costs that squeezed household finances.

External and Domestic Demand:

The data revealed that external demand (exports minus imports) reduced overall GDP by 0.4 percentage points, while domestic demand shaved off 0.1 percentage points.