The Zhitong Finance App learned that at a time when the Bank of Japan is trying to set the right pace for policy normalization, the Japanese economy may shrink in the first three months of 2024, which casts a shadow over economic growth prospects. Japan will release first-quarter gross domestic product (GDP) data on Thursday. Economists surveyed by Bloomberg expect Japan's first-quarter GDP to shrink at an annual rate of 1.2%. Preliminary data is expected to show a decline in consumer and business spending, while net exports are dragging down economic growth for the first time in a year.

“This result is likely to indicate that the Japanese economy is at a standstill,” said Yoshiki Shinke, senior executive economist at the Dai-ichi Life Research Institute. After the Daihatsu Motor Company certification scandal broke out, “the main reason for Japan's economic contraction was a sharp decline in automobile production.”

Shinke said that the suspension of production of Daihatsu Motor, a subsidiary of Toyota Motor Corporation, has put pressure on automobile sales, exports and corporate capital investment.

Japan's economic decision-making is at an inflection point. The bleak economic situation, particularly weak consumption, makes people wonder whether the Bank of Japan can take further steps to normalize policy after the historic interest rate hike in March. The Bank of Japan is closely monitoring whether demand-driven inflation is taking root in Japan, supported by strong wage growth.

Shinke said that GDP data is vulnerable to ongoing seasonal adjustments, and the data for the fourth quarter of 2023 may be revised to shrink rather than an annualized increase of 0.4%.

Economists expect Japan's economy to shrink in the first quarter of 2024

Most economists expect that the Bank of Japan will stick to the route of raising interest rates again. Many expect the Japanese economy to rebound in the second quarter ending June as automobile production rebounds and the highest wage increase in 30 years boosts consumer confidence.

Real wages adjusted for inflation may turn positive later this year, reversing a full two-year downward trend. Additionally, starting in June, many families will receive a one-time tax cut.

However, downside risks remain. Subsidies to limit rising utility costs will end at the end of May, which will drive up the cost of living. A weak yen is likely to increase energy and food import costs, thereby increasing consumer pain.

Ryutaro Kono, chief Japanese economist at BNP Paribas, said: “I expect the Japanese economy to recover from the second quarter, driven by exports and corporate capital investment, but it is difficult to expect a strong rebound in consumption.”

The yen has come into focus because of its potential to rekindle cost-driven inflation. The recent sharp fluctuation in the yen has prompted speculations that the relevant authorities are interfering in the foreign exchange market to support the yen. Bank of Japan Governor Kazuo Ueda recently adjusted his wording about the depreciation of the yen, implying that the yen will influence policy direction.

In the past, the economic downturn led Japan to launch large-scale economic stimulus programs. In March of this year, the Bank of Japan raised interest rates for the first time since 2007, and continued high inflation may pave the way for the next rate hike. There are signs that members of Japan's ruling Liberal Democratic Party disagree on whether the central bank should raise interest rates again or keep interest rates low to stabilize financing.

Japanese Prime Minister Fumio Kishida's approval rating remains low as voters are outraged by the political bribery scandal. In March of this year, Fumio Kishida promised to ensure that workers' income will grow faster than inflation this year.

According to a public opinion survey conducted this month, the approval rating for Fumio Kishida's cabinet was 24%, up 1 percentage point from April. On April 28, the Liberal Democratic Party lost in a special election. The party will hold its next leadership election in September.