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Despite high inflation and a global slowdown, Japan GDP grew 1.6% year-on-year during the first quarter of 2023, thanks to the robust consumer spending and recovery from Covid-19. The economy grew 0.4% over the previous quarter.
Japan currently is the only country which has not hiked interest rates to curtail inflation. A change was expected at the first policy meeting of the Bank of Japan’s newly appointed Governor Kazuo Ueda, but the central bank decided to stick with its long-standing accommodative monetary policy. Japan kept interest rates unchanged at -0.1%. However, expectations that Ueda would tweak the policy are rising due to the faster-than-expected growth in the first quarter.
The Asian country’s inflation rate fell from 3.3% in February to 3.2% in March, the lowest since September 2022.
“The easing of covid restrictions, along with government fiscal support, appears to have boosted consumption and investment. We anticipate some yield curve control (YCC) policy adjustment at the upcoming June meeting, as we believe the macroeconomic conditions now support sustainable inflation above 2%,” writes Min Joo Kang, Senior Economist, South Korea and Japan, at ING.
What drove Japan GDP?
Japan GDP figures got help from the government’s price relief measures, whereas better wage growth supported private consumption, which constitutes most of the GDP and domestic demand. Private consumption grew by 0.6%, making it the fourth consecutive quarter of growth. Service-related sectors such as transportation, food services and lodging benefitted from the recovery from the pandemic.
Capital investments rose 0.9%, which is the first jump in the last two quarters. Residential investment had a second consecutive quarter of positive growth with an increase of 0.2%. Investment in automobiles also grew.
The easing of supply constraints on semiconductors facilitated the growth of automobiles. In terms of nondurable goods, food products turned negative due to high prices, while electricity consumption turned positive.
Government spending increased by 2.4% in Q1, making it the fourth consecutive quarterly increase.
The 4.2% decrease in exports made it the first decline in six quarters, mainly due to poor exports of semiconductor production equipment due to the slowdown in the global semiconductor market. Exports of automobiles and construction machinery also fell.
“Japanese GDP has significantly exceeded market expectations, albeit at a low level. Consumer prices rose at a much slower pace compared to the first quarter of last year. Inflation also eased in most other components of GDP, particularly housing construction and investment spending. This must be a relief for the central bank and bond investors,” said John Vail, Chief Global Strategist at Nikko AM.
