According to a report released by Japan’s Cabinet Office on Tuesday, the country’s real gross domestic product (GDP) grew at an annualized rate of 2.1% in the first quarter of this year, higher than the 1.7% previously predicted by economists and also faster than the 0.8% growth rate in the previous quarter, which was revised downward. Stronger-than-expected growth in private consumption and trade were the main factors driving the acceleration in economic growth.
The report shows that before the full impact of the war in Iran began to manifest, the Iranian economy accelerated its growth during the January to March period. This robust growth gives policymakers reason to believe that the Iranian economy has sufficient resilience to withstand higher borrowing costs, while the central bank is also seeking to continue with policy normalization and address the risk of rising inflation.
This is a measure that policymakers might wish to take before the indirect effects of the Middle East conflict start to show more signs of hindering economic growth.
Takayuki Higashi, a senior economist at Japan Post Insurance, said, “Based on these data, the government may be more willing to accept further interest rate hikes. This could leave room for the Bank of Japan to raise interest rates as early as June or July before the next GDP data release.”
Despite strong economic growth data, the yen weakened slightly against the US dollar after the release of the figures. Overnight swap rates were largely unchanged, indicating a roughly 77% chance of a rate hike by the central bank in June.
The report shows that private consumption, which accounts for more than 50% of Japan’s GDP, rose by 0.3% year-on-year (non-annualized data), higher than the previous expectation of 0.1%. This might be attributed to the government’s utility subsidies and the fact that wage growth has finally started to outpace inflation. However, consumer confidence has been weakening since the outbreak of the war.
The supporting role of net exports to the economy also exceeded expectations. The trade data for March indicated that Japan’s export growth rate picked up as Chinese demand rebounded.
The growth rate of corporate investment has slowed to a 0.3% quarter-on-quarter increase. The Ministry of Finance’s enterprise survey in March showed that corporate profits have grown for the fifth consecutive quarter. The global AI boom and the continuous growth in demand for digitalization against the backdrop of labor shortages continue to support corporate investment intentions.
During his recent visit to Japan, US Treasury Secretary Scott Bessent spoke of the strong momentum of the Japanese economy and hinted that it was an appropriate time to raise interest rates. He stated that the “robust and resilient” fundamentals of the Japanese economy would eventually be reflected in the exchange rate.
The measures taken by the municipal government to address the energy price hikes caused by the Middle East crisis should help maintain consumption levels in the coming months. However, economists point out that rising inflation and weakened business confidence may curb economic growth.
With these support measures in place, Japan can avoid negative growth in the second quarter, said Higashi. “But inflation may still put pressure on actual consumption and investment.”
