Japan downgrades Q1 GDP on construction data corrections
JAPAN downgraded first-quarter gross domestic product (GDP) on Monday (Jul 1) and the service-sector business mood soured in June on concerns over rising costs, offsetting a lift in factory confidence and pointing to weakness in consumption.
The findings, which come ahead of the Bank of Japan’s (BOJ’s) next policy meeting on Jul 30 and 31, complicate its decision on how soon to raise interest rates, analysts say.
Japan’s economy shrank more than initially reported in the first quarter, the government said in a rare unscheduled revision to GDP data on Monday, darkening prospects for a fragile recovery.
Japan’s real GDP shrank an annualised 2.9 per cent in January-March, down from an earlier estimate of a 1.8 per cent contraction, the revised data showed.
The real GDP for the October-December period was also revised down to an annualised 0.1 per cent growth versus the previous 0.4 per cent increase, while that for the July-September period was revised down to an annualised 4.0 per cent decline from the previous 3.7 per cent drop.
The government said the revisions to GDP figures for January-March reflected corrections made in construction orders data.
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The revisions, which came on top of recent weak consumption and output data, are likely to affect the BOJ’s quarterly growth and price forecasts due at its Jul 30-31 policy meeting.
The BOJ ended negative interest rates in March on the view that sustained achievement of its 2 per cent inflation target has come into sight. Governor Kazuo Ueda has signalled the chance of more hikes if underlying inflation heads towards 2 per cent, as it projects.
Many market players expect the BOJ to raise rates again this year, with some betting on the chance of action in July. Others, however, see hurdles for the BOJ to act so soon.
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Yoshiki Shinke, an economist at Dai-ichi Life Research Institute, expects the GDP revisions to lead to a significant downgrade in this fiscal year’s growth forecast.
“I wonder if the BOJ can manage to trim bond buying and hike rates simultaneously in July, when there’s a growth downgrade showing the economy was in worse shape than thought,” he said.
Separately, the BOJ’s tankan showed service-sector firms were less optimistic in June than three months ago, suggesting a tight job market and soft consumption were hurting sentiment.
An index of big non-manufacturers’ sentiment fell to +33 in June from +34 in March, matching market forecasts and worsening for the first time in two years.
By contrast, the headline index measuring big manufacturers’ mood rose to +13 in June from +11 in March, exceeding a median market forecast for a reading of +12.
The reading, the highest since March 2022, reflected a rebound in auto output and manufacturers’ success in passing on rising costs of raw material through price hikes.
Big firms plan to increase capital expenditure by 11.1 per cent in the current fiscal year ending in March 2025, after a gain of 10.6 per cent in the previous year, the tankan showed.
In a sign of rising inflationary pressure, an index of output prices rose for both manufacturers and non-manufacturers, the survey showed.
Long-term corporate inflation expectations also heightened slightly, with companies projecting inflation to hit 2.3 per cent three years from now and 2.2 per cent five years ahead, the tankan showed.
“Corporate inflation expectations seem anchored at 2 per cent,” said Ko Nakayama, chief economist at Okasan Securities. “The tankan is a tailwind for the BOJ in normalising monetary policy.”
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