By Leika Kihara
TOKYO, May 19 (Reuters) – Japan’s economy grew faster than expected in the first quarter on solid exports and consumption, data showed, though momentum will face a severe test as the full force of the energy shock from the Iran war filters through businesses and consumers.
The data will be one of the key factors the Bank of Japan will scrutinise in determining whether the economy can withstand the energy crisis, and allow it to raise interest rates as soon as next month.
“Today’s data shows the economy was on a solid footing before the Iran war, which means it has some buffers to weather the energy shock,” said Yoshiki Shinke, senior executive economist at Dai-ichi Life Research Institute.
“The economy may contract in the second quarter but if it’s just about prices rising overall, it can probably resume a recovery thereafter. If there’s huge supply disruptions, the damage to growth could be so severe the BOJ may not have scope to raise interest rates in June,” he said.
Japan’s real gross domestic product (GDP) increased an annualised 2.1%, data showed on Tuesday, outstripping the median market forecast for a 1.7% gain and a revised 0.8% rise in the previous October-December quarter.
The second straight quarter of expansion was underpinned by solid exports with net external demand adding 0.3 percentage point to growth, the data showed.
Private consumption and capital expenditure both grew 0.3% from the previous quarter, suggesting that robust corporate profits and steady wage gains were supporting the recovery.
But analysts expect growth to slow in the coming quarters as the fallout from the Middle East conflict, which has caused an unprecedented disruption to global energy supplies, intensifies.
“We think the Q1 GDP is already in the rear-view mirror and expect the economy to feel the strains from high energy costs ahead. Higher energy prices and elevated uncertainty will limit consumption and investment in the near term,” analysts at Oxford Economics wrote in a research note.
Iran’s effective shutdown of the Strait of Hormuz in response to U.S.-Israeli attacks late in February has sent oil prices sharply higher and raised fears of severe supply disruption.
Japan is particularly vulnerable to the energy shock due to its heavy reliance on oil imports from the Middle East, with surging fuel costs driving up inflation, while weighing on corporate profits and the broader economy.
The shift in the outlook is already rippling through policy expectations. The BOJ has dialled up hawkish signals that had prompted markets to price in a strong chance of an interest-rate hike in June.
The government, for its part, will compile an extra budget to fund subsidies aimed at cushioning the economic blow from soaring fuel costs, a move that would strain Japan’s already worsening finances.
(Reporting by Leika Kihara; Editing by Sam Holmes and Shri Navaratnam)
Comments