In the first quarter, Japan’s economy contracted, facing obstacles from weaker consumption and external demand. This presents a new challenge for policymakers as they consider raising interest rates from near-zero levels. Preliminary gross domestic product (GDP) data from the Cabinet Office showed an annualized drop of 2.0% in the January to March months, faster than expected.
Private consumption, which accounts for more than half of Japan’s economy, fell 0.7% in the first quarter. This marks the fourth consecutive quarter of decline, the longest streak since 2009. Despite strong corporate earnings, capital spending also experienced a decline. External demand, including exports minus imports, further contributed to the contraction.
Despite concerns about higher living costs due to a sharp decline in the yen, policymakers are banking on rising wages and income tax cuts to boost consumption. However, analysts remain cautiously optimistic about the economy rebounding in upcoming quarters. They anticipate that the drag from the earthquake in the Noto area and Toyota’s Daihatsu unit suspension will fade in coming months. The outlook relies heavily on improvements in consumption and external demand to drive growth in upcoming quarters.
The Bank of Japan (BOJ) raised interest rates for the first time since 2007 in March but is expected to move cautiously in unwinding easy money conditions given the fragility of the economy.
