Japan’s economy grew at a still solid pace at the start of the year even after the turbulence in Iran prompted businesses to cut investment.
Real gross domestic product expanded at an annualised pace of 1.8% in the first quarter, down from an initial reading of 2.1%, the Cabinet Office reported on Monday. Business investment was downgraded to minus 0.7% quarter on quarter from 0.3% growth previously.
Economists were predicting a markdown to GDP after a report last week showed Japan’s biggest companies reduced capital spending in the January-March period. The conflict in Iran began to escalate toward the end of that period, with oil prices spiking in early March.
The revised rate still points to a largely resilient economy supported by solid consumer spending and trade, with demand for artificial intelligence-related products providing a key boost for exports. Monday’s report showed that figures for private demand and exports were left unchanged, with consumption rising 0.3% from the previous quarter. Net exports added to growth.
Overall, the report should keep the Bank of Japan on track to raise interest rates next week, as policymakers have expressed a desire to continue to normalize policy so long as growth stays intact. It remains to be seen how business investment fared deeper into the Iran war, which could still weigh on growth.
"The impact of the Middle East situation didn’t materialize in the first quarter, but it is likely to become apparent going forward,” said Shinichiro Kobayashi, chief economist at Mitsubishi UFJ Research and Consulting. "Given the recent remarks from the BOJ, it appears it is focusing more on curbing inflation, so I expect it to raise interest rates this month.”
"Japan’s smaller-than-expected downward revision to first-quarter GDP left the economy still growing at a pace of above its potential. That means it won’t knock the Bank of Japan off course to deliver a widely expected rate hike at its June 15-16 meeting,” says
Taro Kimura, economist, Bloomberg Economics.
Private residential investment was revised higher to 0.9% growth, while public investment also was upgraded a tad.
The GDP report is the last major economic indicator before the BOJ’s meeting that ends June 16. Officials are set to consider a rate hike at that gathering and see the possibility of a further increase later this year, Bloomberg reported on Thursday. Governor Kazuo Ueda also signaled a good chance of raising rates this month as his remarks in a speech last week expressed greater concern about inflation than economic activity.
Another report on Monday showed that Japan’s current account surplus narrowed in April.
Separate data out Friday showed Japanese workers’ real wages increased for a fourth straight month in April, but household spending still fell for a fifth month as consumers contending with inflation cut back on discretionary outlays. Concerns about domestic demand prompted Prime Minister Sanae Takaichi to compile a supplementary budget plan to fund subsidies meant to cushion households from rising energy costs.
A weak yen continues to inflate import costs for resource-poor Japan, which relies heavily on the Middle East for energy. Japan used a record amount of foreign reserve assets over the past month to prop up the yen after it weakened past the 160-per-dollar threshold. The yen strengthened to around 155 but has since surrendered that gain. It traded around 160.33 per dollar in Tokyo on Monday morning.