Japan Q1 economy contracts; interest rate hike hopes dampened

Nurluqman Suratman


SINGAPORE (ICIS)–Japan’s economy shrank by 2.0% on an annualized basis in January-March 2024 as domestic consumption and capital spending weakened.

  • Weak yen fuels inflation, hurts consumer spending
  • Core inflation slows but remains above 2% target
  • Japan central bank faces tough challenge of balancing growth and inflation

The first-quarter reading reverses the 0.4% year-on-year growth in October-December 2023. On a quarter-on-quarter basis, Q1 GDP posted a 0.5% contraction, according to preliminary data released by Japan’s Cabinet Office on Thursday.

Private consumption, which makes up more than half of Japan’s economic growth, fell by 0.7% in the first three months of 2024, marking the fourth straight quarter of decline and extending the 0.4% decline in the last three months of last year.

Capital spending – a crucial component of private demand – decreased by 0.8% in the first quarter, reversing the 1.8% expansion in the fourth quarter.

Net exports of goods and services fell by 0.3% in the first quarter.

The sharp decline of the Japanese yen (Y) to levels not seen since 1990 has raised concerns about increasing living costs and depressed consumer spending.

At 04:12 GMT, the yen was trading at around Y154 to the US dollar, strengthening from the recent record low of around Y159 in late April.

In March to April, the yen had continued to weaken despite the Bank of Japan’s (BoJ) decision to hike interest rates in March for the first time in 17 years, ending eight years of negative rates.

The central bank is expected to proceed cautiously in tightening monetary policy due to the fragile state of the economy.

Japan’s nationwide core consumer price index (CPI), which excludes fresh food items but includes energy items, rose by 2.6% year on year, data from the BoJ showed on 14 May.

The number represented a deceleration from February’s 2.8% print but remained well above the central bank’s 2% target.

“The year-on-year rate of increase in the CPI is likely to be in the range of 2.5-3.0% for fiscal 2024 [year ending 31 March 2025] and then be at around 2% for fiscal 2025 and 2026,” Japan’s Ministry of Finance (MoF) said in a report on 15 May.

Meanwhile, underlying consumer inflation, which excludes temporary fluctuations, is expected to increase gradually and then be at a level that is generally consistent with the price stability target of 2%, it said.

“If the BOJ also expects GDP to recover in 2Q24, then the BoJ’s focus should remain on high inflation and the JPY [Japanese yen] as a major contributor to high inflation,” Dutch banking and financial information services provider ING said in a note on Thursday.

“April inflation is expected to ease quite sharply due to a high base last year, but pipeline inflation indicates upward inflationary pressures building for the coming months,” it said.

“We believe that the BoJ is ready to act in July, as it confirms that strong wage growth is boosting household spending,” it added.

Japan’s economy is likely to keep growing at a pace above its potential growth rate, with overseas economies growing moderately, as well as financial conditions being accommodative, the finance ministry said in its 15 May report.

Focus article by Nurluqman Suratman


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