Japan’s Economic Contraction Expected to Narrow in Q1, but Risks Persist

According to a Reuters poll, Japan’s economy likely contracted at a slightly slower pace than initially reported in the first quarter of 2024, due to upward revisions in capital spending figures. However, economists warn that significant risks continue to cloud the outlook for recovery.

The revised gross domestic product (GDP) data, expected to be released on Monday by the Cabinet Office, is predicted to show a 1.9% annualized contraction in Q1, a marginal improvement from the initial estimate of 2.0%. This translates to a quarter-on-quarter contraction of 0.5%, unchanged from the initial reading.

The upward revision in GDP is primarily attributed to a smaller-than-expected decline in capital expenditure, a key indicator of private demand. The revised data is expected to show a 0.7% fall in capital expenditure in Q1, slightly better than the initial estimate of 0.8%.

Despite this positive sign, the outlook for the Japanese economy remains uncertain. While tax cuts and wage hikes are expected to drive growth in the current quarter, rising import costs due to a weaker yen are putting pressure on consumption. Additionally, disruptions at some automakers could further weigh on economic activity.

Preliminary data revealed a 0.7% decline in private consumption, a significant component of the Japanese economy, during the first quarter. This contraction was attributed to rising living costs caused by the weaker yen, which has squeezed household finances.

External demand, measured as exports minus imports, also contributed to the overall GDP contraction, shaving off 0.3 percentage points.

Separate data from the Bank of Japan (BOJ), due on June 12th, is expected to show a 2.0% year-on-year and 0.4% month-on-month increase in the corporate goods price index for May. This index measures the prices of goods companies charge each other and serves as an indicator of inflationary pressures.

In conclusion, while Japan’s economic contraction is projected to be slightly less severe than initially estimated, the path to recovery remains fraught with challenges. The impact of rising import costs, disruptions in the auto industry, and potential inflationary pressures could all hinder the country’s economic growth in the coming months.