Japan’s economy shrinks 1.8% in Q1

Japan’s economy contracted slightly less than expected in the first quarter, with GDP declining by 1.8 per cent on an annualised basis, Reuters reported on Monday citing data from the Cabinet.

This revision from the initial estimate of a 2.0 per cent decline may provide some relief to the Bank of Japan (BOJ) as it considers future interest rate hikes. The quarter-on-quarter contraction was 0.5 per cent, consistent with the first reading.

Increased capital spending and inventory data revisions were the main factors behind the improvement. Analysts at Nomura Securities suggest a possible uptick in business investment, though modest.

Despite the revised outlook, the Japanese economy continues to face challenges. A weak yen and disruptions in the auto industry are impacting the current quarter’s prospects. Private consumption, a key growth driver, declined by 0.7 per cent in Q1, marking the fourth consecutive quarter of decrease due to rising living costs.

The BOJ will have a policy meeting this week, and markets are watching for any hints about changes to its bond-buying programme. There is speculation that the bank may reduce its purchases of JGBs to start normalising its monetary policy and addressing yen depreciation.

The March rate hike marked a significant shift away from the BOJ’s long-standing ultra-accommodative policy. Investors are now looking for clues on the timing of further tightening moves.

External demand, measured by the difference between exports and imports, subtracted 0.4 percentage points from overall GDP growth in Q1, while domestic demand contributed a negative 0.1 point.