Japan Economic Forecast

GDP grew 1.6% in seasonally adjusted annualized terms in Q1, exceeding market expectations. This growth figure was higher than in the Euro area (0.4%) and the U.S. (1.3%). According to the Bank of Japan, the output gap remained negative at the end of last year, meaning the economy likely enjoyed some catch-up growth in Q1. Private spending and investment grew more than expected, with the former benefitting from pandemic restrictions being eased by the government. Less positively, exports fell for the first time in six quarters. Turning to Q2, GDP growth should remain roughly stable. On the one hand, with the output gap closing, catch-up growth is likely waning. On the other hand, exports should be rebounding, supporting activity. High-frequency data has been mixed: While merchandise exports grew less in April than in Q1, the composite PMI surged to an over nine-year high in May.

Inflation rose to 3.5% in April (March: 3.2%), while core inflation rose to 3.4% (March: 3.1%). Our panelists see inflation dipping below the BoJ’s 2.0% target by Q4 2023, as last year’s spike in inflation was largely caused by cost-push factors. That said, recently higher-than-expected wage growth poses an upside risk.