Japan’s economy faced challenges in the first quarter as it contracted due to weaker consumption and external demand. This poses a new challenge for policymakers as the central bank aims to increase interest rates from near-zero levels. Preliminary GDP data from the Cabinet Office showed that Japan’s economy shrank by 2.0% annualized in the January to March months, which was faster than the 1.5% drop predicted by economists. This was a bigger contraction than the 0.5% decline expected by economists.
Despite strong corporate earnings, capital spending fell by 0.8% in the first quarter. Private consumption, which makes up more than half of Japan’s economy, fell by 0.7% in the first quarter, marking the fourth straight quarter of decline, the longest streak since 2009. External demand, which refers to exports minus imports, contributed to the decline in GDP estimates.
Policymakers are optimistic about a rebound in the economy in the coming months, fueled by rising wages and income tax cuts from June onwards. The impact of the earthquake in the Noto area and the suspension of operations at Toyota’s Daihatsu unit are expected to fade, contributing to growth. However, concerns have been raised about higher living costs due to a sharp decline in the yen to levels not seen since 1990. The Bank of Japan raised interest rates for the first time since 2007 in March, moving away from negative rates. However, given
