Japan’s economy expanded at a faster pace than expected as a further easing of pandemic regulations boosted consumption, a positive outcome that will likely keep speculation simmering of a possible early election and potential central bank policy change.
Gross domestic product expanded at an annualized pace of 1.6% in the first three months of the year for the strongest growth in three quarters, after a technical recession at the end of last year following a revision in earlier figures, Cabinet Office data showed Wednesday. Last quarter’s expansion exceeded analysts’ estimates of 0.8% growth and was also supported by better-than-expected business spending.
The stronger-than-forecast reading bodes well for the nation’s economic recovery and could give Prime Minister Fumio Kishida more leeway to consider an early poll. Kishida is hosting Group of Seven leaders in Hiroshima this week and a successful summit could give his support ratings an additional lift.
An economy growing faster than expected despite a global downturn may also offer some reassurance to the Bank of Japan as freshly installed Governor Kazuo Ueda mulls the sustainability of growth in the economy, wages and prices. Some market players and economists are expecting Ueda to tweak policy before a review he called in April is completed.
The better-than-expected result is likely to keep speculation alive that the Bank of Japan may start normalizing its policy after a decade of aggressive monetary easing. Such speculation has been persistent even as the BOJ’s Ueda repeatedly said the bank has yet to project inflation will be anchored above its 2% target and therefore the bank will need to keep up easing.
The world’s third largest economy faces both headwinds and tailwinds as it aims to gain more momentum toward a robust post-pandemic recovery. Earlier this month, the government lowered its classification of Covid-19 to be on par with seasonal flu.
At home, stronger wage growth and additional price relief measures by the government are supporting consumption. But it remains to be seen if paychecks can keep up with the pace of inflation that is so far proving stickier than expected.
Downside risks mainly stem from slowdown concerns over the global economy in the wake of higher interest rates to cool inflation. Weaker overseas demand will likely hurt exports from Japan and discourage companies from capital investment. Wednesday’s data showed net trade dragged more than estimated on last quarter’s growth.
(Updates with more details from the report)