Japan's economy demonstrated resilience in the first quarter of the year, with DBS economists Taimur Baig and Radhika Rao projecting a 1.8% quarter-on-quarter seasonally adjusted annualized rate (QoQ saar) GDP growth, an improvement from the previous quarter's 1.3% [1]. This growth was primarily supported by robust exports and increased investment in artificial intelligence (AI) and semiconductor sectors, which contributed to stronger industrial production and capital expenditure [1]. Despite these positive factors, domestic consumption showed signs of softening, as indicated by the Bank of Japan's (BoJ) consumption activity index, even though retail sales, including spending by foreign visitors, rose during the quarter [1].
Looking ahead, the economists maintain their full-year GDP growth forecast at 0.5%, citing the solid first-quarter performance as a buffer against potential headwinds such as the Middle East conflict and higher energy prices anticipated in the second quarter [1]. However, Japan's trade balance is expected to return to deficit territory in April, driven by decelerating export growth and rising imports, particularly due to higher oil prices. This deterioration in the trade balance is identified as a key factor weighing on the Japanese Yen (JPY), with the impact of recent government foreign exchange interventions likely to be temporary unless oil prices decline significantly [1].
On the inflation front, April's Consumer Price Index (CPI) is expected to remain steady at 1.5% year-on-year, supported by government energy subsidy measures. With inflation relatively subdued, the BoJ is not anticipated to raise interest rates at its June policy meeting. Instead, DBS economists continue to expect a 25 basis point rate hike in July [1].
CONCLUSION
Japan's first-quarter GDP growth remains robust, driven by strong exports and investment in AI and semiconductors, but the Yen faces pressure from a worsening trade balance and higher oil prices. Inflation is expected to stay moderate, prompting the Bank of Japan to delay rate hikes until July. Market participants are likely to remain cautious, monitoring trade and energy price developments closely.