(Bloomberg) – Japan’s economy grew faster-than-expected as further easing of pandemic regulations boosted consumption, a positive result likely to keep speculation boiling over a possible snap election and a possible change in central bank policy.
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Gross domestic product grew at an annual rate of 1.6% in the first three months of the year, the strongest growth in three quarters, after a technical recession at the end of last year after a revision of previous figures, Cabinet Office data showed on Wednesday . Expansion in the most recent quarter beat analyst estimates of 0.8% growth.
Better-than-expected consumer and corporate spending were the main drivers of growth last quarter, while trading weighed on the overall numbers.
“Faced with the return of domestic demand and labor shortages, companies cannot do business without investment,” said Atsushi Takeda, chief economist at the Itochu Research Institute. “Corporate capital investment plans are unlikely to change in the short term.”
The stronger-than-predicted reading bodes well for the country’s economic recovery and could give Prime Minister Fumio Kishida more leeway to consider an upcoming poll. Kishida hosts the leaders of the Group of Seven in Hiroshima this week and a successful summit could further increase his support levels.
Faster-than-expected economic growth despite a global slowdown could also provide some reassurance for the Bank of Japan as newly appointed Governor Kazuo Ueda reflects on the sustainability of economic growth, wages and prices. Some market participants and economists expect Ueda to adjust policy before a review he announced in April is complete.
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The better-than-expected result should keep speculation alive that the Bank of Japan may begin to normalize policy after a decade of aggressive monetary easing. Such speculation continued, although the BOJ’s Ueda repeatedly said that the bank had not yet forecast that inflation would be anchored above its 2% target and that the bank must therefore continue easing.
The world’s third largest economy faces both headwinds and tailwinds as it aims to gain more momentum towards a robust post-pandemic recovery. Earlier this month, the government lowered the classification of Covid-19 to the same level as seasonal flu.
Domestically, stronger wage growth and additional government price-cutting measures are supporting consumption. However, it remains to be seen whether paychecks will be able to keep up with the pace of inflation, which is proving more persistent than expected so far.
Downside risks mainly stem from concerns about a slowdown in the global economy as interest rates rise to cool inflation. Weaker foreign demand is likely to hurt exports from Japan and discourage companies from investing capital. Data on Wednesday showed that net trade weighed on recent quarter growth more than expected.
Japan’s economy alternated between growth and contraction, with the post-pandemic recovery lagging behind that of its global peers. Since the start of 2021, Japan’s economy has contracted in five out of nine quarters.
Inflation has been above the BOJ’s 2 percent target for some time, but Ueda expects it to fall back below that level later this fiscal year as cost drivers in energy and commodities ease.
– Featuring Yusuke Miyazawa, Ryotaro Nakamaru and Tomoko Sato.
(Updates with more details from the report, comments from economists)
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