Japan’s economy has been hit hard in the first quarter of this year, with a 2% annual rate of shrinkage. The slowdown was caused by declining consumption and exports, which are major factors that drive economic activity in the country. Despite low unemployment rates of around 2.6%, slow wage growth and rising prices have been a concern.
The weakening yen against the U.S. dollar has contributed to the rise in prices, boosting tourism but reducing purchasing power for Japanese consumers who rely heavily on energy imports. In the January-March period, GDP slipped by 0.5% on a quarter-to-quarter basis, according to the Cabinet Office. Analysts had expected better results than those reported, with issues at Toyota Motor Corp.’s subsidiary earlier in the year also contributing to the slowdown.
However, production has since rebounded at Toyota Motor Corp., but concerns remain about consumer spending, which accounts for a significant portion of economic activity in Japan. Issues at Toyota Motor Corp.’s subsidiary earlier in the year have had a major impact on growth and will continue to be closely monitored by analysts and policymakers alike.
With recent data showing a challenge for Japan’s central bank in deciding when to raise interest rates further, there is speculation that an interest rate hike could come as early as July. The Bank of Japan had previously raised interest rates earlier this year for the first time in over a decade, from a range of minus 0.1% to zero to 0.1%. Policymakers are expected to proceed cautiously given the current weak economic conditions and will likely consider other measures such as fiscal stimulus before making any decisions about raising interest rates again
