Japan’s Q1 GDP Falls Faster Than Expected

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• Japan’s Q1 GDP falls faster than expected
• Data raises questions about when the BOJ will lift interest rates.
• Yen's weakness complicates picture for BoJ
• Japan's real wages fell for a 24th consecutive month

Japan's economy fell faster than expected in the first quarter. Preliminary gross domestic product data from the Cabinet Office on Thursday showed Japan's economy shrank -2% annualized in January to March from the prior quarter, faster than the 1.5% drop seen in a Reuters poll of economists.

In the first quarter of this year, private consumption, which is the largest component of GDP, dropped by an annualized -2.7% from the previous three-month period. Corporate investment fell -3.2%. Exports fell 18.7%, while imports also fell -12.8%, resulting in a decline in net exports. Private residential investment dropped -9.8% from the previous quarter.
Downwardly revised data showed GDP barely grew in the fourth quarter of 2023, due to downgrades to capital expenditure estimates.



Japan’s GDP Growth. Source: Japan’s Cabinet Office

Data raises questions about when the BoJ will lift interest rates
The BoJ raised interest rates for the first time since 2007 in March, and persistently high inflation may pave the way for another move. There are signs of a division among ruling Liberal Democratic Party members over whether the central bank should hike again or keep rates low to smooth financing. The BoJ is paying close attention to whether demand-driven inflation, backed by strong wage growth, is taking root in Japan.

Yen's weakness complicates picture for BoJ

A weaker yen has created a two-speed economy in Japan, with the export and tourism sectors broadly benefiting from a more competitive exchange rate. However, households and small businesses are squeezed by inflated costs of imported goods.
The yen's weakness complicates the question of whether the BoJ should maintain its monetary stimulus or continue to unwind it.

• Japan's real wages fall for 24th consecutive month

When real wage growth remains negative, it's hard to expect strong private consumption. The weakening of domestic demand coincides with inflation outpacing wage growth.

This comes despite the annual wage negotiations in the spring between labor unions and management yielding the best outcome in three decades after major companies weighed the impact of the recent bout of cost-push inflation and agreed to hike pay.
Real wage growth, seen as crucial for Japan to completely emerge from its long fight against deflation, has lagged behind price hikes, eroding households' purchasing power as prices for everyday goods have continued rising due to high raw material costs and a weak yen.



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