TOKYO (`) – Japan’s economy contracted in the first quarter, but at a slower pace than previously thought, the government said on Wednesday.
The world’s third-largest economy shrank at an annual rate of 0.5%, according to the Cabinet Office. That was less than the 1.0% decline in the preliminary estimate for Japan’s real gross domestic product, or GDP, released in May.
The annual rate shows how the economy would have grown if the quarterly rate had continued for a year. Japan’s economy shrank 0.1% qoq in January-March, better than the 0.2% qoq contraction in the preliminary data.
Consumer spending and other private demand were stronger than previously assumed.
The upward correction came as a pleasant surprise to analysts.
“Looking ahead, we expect Q2 GDP to recover, mainly on better private consumption, but higher commodity inflation is likely to limit real gains,” said Robert Carnell, Regional Head of Research Asia -Pacific at ING, in a report .
The country’s expected reopening to tourists as restrictions to curb COVID-19 infections are lifted should also boost growth.
On the downside, Japan, which imports almost all of its oil, much of its food and miscellaneous products, has been hit by rising prices for energy and other commodities, partly due to the war in Ukraine.
Japan has been fighting deflation or spiraling prices for years. Low wage growth and an aging and shrinking population have slowed economic activity and discouraged business investment.
Bank of Japan Governor Haruhiko Kuroda on Tuesday apologized for recently speaking of “tolerance to higher prices” among the Japanese, a comment that has been interpreted as welcoming higher prices. Kuroda was grilled in Parliament, where he told lawmakers his comment was inappropriate.
Kuroda has championed policies aimed at boosting near-zero inflation to around 2%, but progress has been slow until global prices for oil and other commodities surged in recent months.
Some analysts say Japan has gradually lost its competitive advantage because it hasn’t done enough to encourage innovation and unleash new sources of growth that old bureaucracies have held in check.
A source of concern is the falling value of the yen, which is now trading at a 20-year low of around 133 yen to the US dollar.
Although a weak currency is a boon for Japanese exporters and boosts the value of overseas earnings, analysts say the weak yen also reflects a weak economy. Rising interest rates in the US and elsewhere relative to Japan, where interest rates are near zero, are likely to keep the yen weak for some time to come.
Prime Minister Fumio Kishida is pushing what he calls “new capitalism”. He announced an overview of his strategy this week, which aims to boost growth by driving digitization, defense spending, start-up companies and sustainable energy. He also invited investments and explained in English: “Invest in Kishida”.
Former Prime Minister Shinzo Abe, Japan’s longest-serving prime minister, pushed “Abenomics,” focusing on super-easy lending designed to stoke inflation and thereby boost growth. Some critics say Abenomics has failed to build a strong economy and its pitfalls are part of the reason for the weak yen.
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Yuri Kageyama is on Twitter https://twitter.com/yurikageyama
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