Japan’s economy faced a decline in the first quarter due to weaker consumption and external demand. This poses a challenge for policymakers as they aim to increase interest rates from near-zero levels. Preliminary data from the Cabinet Office showed that Japan’s GDP shrank by 2.0% annualized from January to March, which was faster than the 1.5% drop predicted by economists. Additionally, downwardly revised data showed that GDP barely grew in the previous quarter, with a contraction of 0.5%, larger than the anticipated 0.4%.
Private consumption, which accounts for more than half of Japan’s economy, fell by 0.7%, exceeding the predicted drop of 0.2%. This marked the fourth consecutive quarter of decline, the longest streak since 2009. Capital spending also decreased by 0.8% in the first quarter, despite strong corporate earnings.
External demand negatively impacted first-quarter GDP estimates by 0.3 percentage points due to weaker exports and imports. Policymakers are looking towards rising wages and income tax cuts from June to help revive consumption as they try to address falling consumption levels and boost economic growth again.
The sharp decline in the yen to levels not seen since 1990 has raised concerns about higher living costs, putting pressure on consumption. Despite this, policymakers are expected to proceed cautiously in unwinding easy money conditions given the fragile state of the economy.
In conclusion, Japan’s economy is facing challenges due to weaker consumption and external demand, but policymakers are looking towards various measures such as rising wages and income tax cuts to help revive it again soon while being cautious in unwinding easy money conditions given its fragile state at present.
