The Zhitong Finance App learned that as the weak yen continued to hit consumers, Japan's economy declined faster than expected in the first quarter, which posed a new challenge for the Bank of Japan to further raise interest rates. According to preliminary data released on Thursday, Japan's gross domestic product (GDP) fell 2.0% year on year in the first quarter, a decline greater than the 1.5% expected by economists.

The downwardly revised data shows that Japan's GDP grew little in the fourth quarter of 2023 due to lower capital expenditure expectations.

The weak economy is making it difficult for the Bank of Japan to control. In March of this year, the Bank of Japan raised interest rates for the first time since 2007. Since then, it has hinted that it intends to continue tightening the policy.

Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities, said: “The timing of the rate hike may be delayed, depending on the rebound in GDP in the current quarter.”

He said that although the economy will definitely rebound in the current quarter due to rising wages, there is still uncertainty about consumption in the service sector.

According to the latest data, Japan's GDP contracted 0.5% month-on-month in the first quarter, while economists' expectations were for a 0.4% decline. The revised data for the first quarter will be released on June 10.

The weak yen had a double impact. Exports and tourism generally benefited from more competitive exchange rates, but households and small businesses were squeezed by rising costs of imported goods.

Toru Suehiro, chief economist at Daiwa Securities, said that the weakening yen complicated the Bank of Japan's policy.

“The negative impact of the weakening yen is becoming a cause for concern, so some may think interest rates should be raised,” Suehiro said. “Although real wages are likely to rise slightly in the second half of this year, as the yen continues to weaken, real wage levels will not rise significantly.”

Actual wages

Large Japanese companies achieved their biggest wage increase in 30 years this year. The Bank of Japan said this provided the necessary conditions for finally ending decades of aggressive monetary stimulus.

However, prices are rising faster than wages, reducing real income and weakening the purchasing power of Japanese households.

Private consumption, which accounts for more than half of the Japanese economy, fell 0.7%, higher than market expectations of 0.2%. This is the fourth consecutive quarter of decline, the longest since 2009.

Economists hope that the weakness in the first quarter will prove to be temporary, and they expect that this year's earthquake in the Noto region and the suspension of production of Toyota's Daihatsu Motor Company will dissipate the drag on economic growth.

Despite this, the sharp depreciation of the yen and the sharp rise in crude oil prices due to the Middle East crisis still pose a threat to Japan's economic recovery.

Despite strong corporate profits, Japan's capital expenditure fell 0.8% in the first quarter, and the market expected a 0.7% decline.

Currently, Japanese policymakers are counting on drastic wage increases and planned income tax cuts to stimulate sluggish consumption and prevent a return to deflation.

Maruyama of SMBC Nikko Securities said, “Raising interest rates or reducing the scale of debt purchases can ease the pain caused by the weakening yen, which may pave the way for income growth to spill over to consumption.” “If this doesn't happen, it will be difficult to raise interest rates, especially when consumption is still weak.”