TOKYO- Japan’s economy fell faster than expected in the first quarter as the weak yen continued to batter consumers, throwing a fresh challenge to the central bank’s push to get interest rates further away from near zero.
Preliminary gross domestic product (GDP) data from the Cabinet Office on Thursday showed Japan’s economy shrank 2.0 percent annualized in January-March from the prior quarter, faster than the 1.5 percent drop seen in a Reuters poll of economists.
Downwardly revised data showed GDP barely grew in the fourth quarter of 2023, due to downgrades to capital expenditure estimates.
While preliminary capital spending data is often subject to heavy revisions in the final release, the across-the-board declines in all GDP components suggest Japan’s economy had no major growth engine in the first quarter.
That could create some hesitation for the Bank of Japan, which raised interest rates in March for the first time since 2007 and has since signaled its intention to continue tightening policy.
“It would be possible that the timing of rate hikes could be pushed back depending on how the GDP may rebound in the current quarter,” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities.
He said while the economy would certainly rebound in the current quarter due to rising wages, uncertainty remains around consumption in the service sector.
The latest GDP reading translates into a quarterly contraction of 0.5 percent , versus a 0.4 percent decline expected by economists. Revised first quarter figures will be released on June 10.
The weak yen has created a two-speed economy in Japan, with the export and tourism sectors broadly benefiting from a more competitive exchange rate but households and small businesses squeezed by inflated costs of imported goods.
Toru Suehiro, chief economist at Daiwa Securities, said the yen’s weakness complicates the question of whether the BOJ should maintain its monetary stimulus or continue to unwind it.
“The adverse effects of a weaker yen are becoming a cause for concern so one can argue that interest rates should be raised,” Suehiro said.
