As a result of increased spending by businesses, the economy in Japan expanded quicker than had been first projected. This is a most favourable development for Prime Minister Fumio Kishida, who is currently facing continuous rumours that he may call an early election.
According to revised numbers that the Cabinet Office released on Thursday, the gross domestic product increased at an annualized rate which is of 2.7% for the quarter, including January, February, and March. Both the original reading of 1.6% and the expansion prediction of 1.9% by economists were surpassed by this result. The revised data also demonstrated that Japan needed to enter a proper recession around the tail end of the previous year.
Despite worries about a recession in the global economy, the more excellent corporate investment demonstrated that sentiment among corporations remained resilient. The growth estimates got a falsely positive lift from rising stocks, which indicates that demand is not keeping up with supply and is a cause for concern for the future. The news could have been better. Spending by consumers was also found to be somewhat lower than initially expected.
If Kishida does decide to call an early poll, he may point to the stronger-than-expected growth as one of factors that majorly influenced his decision. Stocks are trading at levels approaching their best point in more than three decades. The election rumours may prevent the Bank of Japan from making significant adjustments. The meeting to decide policy will occur at the central bank the following week.
“Rather than focusing on past performance, Kishida will analyze the current state of the economy. Shinichiro Kobayashi, the principal economist of Mitsubishi UFJ Research and Consulting, stated that “the recovery is gaining momentum as we look at the recent economy of Japan.” Kishida may have contemplated calling for early elections to capitalize on the rising optimism people are feeling.
According to a poll conducted by JNN this week, the approval percentage for Kishida’s Cabinet is 46.7%. This is a significant increase from levels seen earlier in the year and comes in the wake of a Group of Seven meetings that was generally favourably received last month.
After the government lifted the COVID-19 limitations, an influx of tourists from other countries encouraged the world’s third-largest economy to play catch-up with its competitors in other countries. The most recent report on GDP allays fears that Japan’s corporate sentiment toward investment may suffer due to a slowdown in the global economic growth.
“Looking into the future, we anticipate that growth will decelerate in 2Q23. It is expected that weaker external demand will impede exports and damper company investment. According to the economist for Bloomberg, Taro Kimura, inflation and declining real incomes would undoubtedly put a ceiling on the recovery in consumer spending.
The real output of Japan’s economy is still below he levels reached at end of the third quarter of 2019, shortly before the country increased its consumption tax. Both private consumption and spending by corporations remained far lower than that level.
Because of inventories’ significant role in the revision, the economist Yoshimasa Maruyama of SMBC Nikko Securities was less convinced that Thursday’s statistics were a favourable development for Kishida.
He stated, “I don’t think the growth rate will affect the timing of an election,” and he was correct in his assessment. “Kishida does not appear to be in a hurry, and he may call one in the fall to have it done before the budget is finished being worked on at the end of the year. Regarding preparedness, opposition parties can only make a difference if he waits a little bit longer.
To determine whether the current recovery will be sustainable and whether or not the BOJ will adjust its ultraloose policy, the interaction between inflation and wage growth holds the key. According to the data from April, salary growth was slower than anticipated and continued to decrease after accounting for inflation. This indicates that increased prices may have an impact on consumer spending.
We may be already seeing the effects of this, considering that consumer spending fell more than anticipated in April compared to the same month the previous year.
Kishida is hoping for a steady increase in their income, but the little momentum in the wage market could be better for him. Wages are also considered a critical indicator of the direction that the BOJ will take with its policies.
In the second quarter, most economists anticipate that the economy will continue to expand, albeit more modestly than in the first quarter. According to the most recent data, Japan avoided a technical recession at the end of 2022; nonetheless, the country is still alternating between periods of expansion and contraction. Since the beginning of 2021, the GDP of Japan has shrunk in four out of the nine quarters that have passed since then.
According to Kobayashi, who works at Mitsubishi UFJ, “Positive growth is expected to continue.” “The only thing which gives me pause is that a few of the data from April, like household expenditure and earnings, were not very good. It’s possible that the economic rebound in the months of April through June won’t be as robust as anticipated.
