Japan Confirms GDP Contraction, Backing Caution From BOJ, Ishiba

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(Bloomberg) — Japan’s economy contracted in the first quarter, a revised estimate confirmed Monday, weakness that supports the Bank of Japan’s cautious stance and keeps political pressure on Prime Minister Shigeru Ishiba ahead of a key election.

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Gross domestic product shrank at an annualized pace of 0.2% in the three months through March, according to the Cabinet Office, a less severe drop than the initial estimate of a 0.7% decline. Economists had expected that initial figure to stand. The improvement was driven by better-than-expected inventory and consumption figures.

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Inventories contributed 0.6 percentage point to growth, double the preliminary estimate, while personal consumption managed to eke out growth of 0.1%, versus a prior flat reading. The inventory gain is an indication of greater output, but also points to unsold goods and components, a potential sign of weak demand. Business spending gained 1.1%, a little weaker than first forecasts, while net exports, the main factor pushing the figures into the red, while net exports posted a drag of 0.8 percentage point.

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The revised data confirms Japan’s economy shrank even before US President Donald Trump amped up tariff pressure in April, deepening uncertainty for policymakers. The BOJ, which slashed its growth forecast for this year at its last policy meeting, is widely expected to maintain its wait-and-see stance when it next meets on June 17.

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“Looking at the GDP results alone, it’s hard for the BOJ to justify a rate hike,” said Kazutaka Maeda, economist at Meiji Yasuda Research Institute. “The bank doesn’t need a rate cut, but it needs to wait and see how things unfold. Overall, today’s data is more of a factor that pushes back the rate hike timing.”

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BOJ officials remain on alert over the tariff impact, with Governor Kazuo Ueda calling uncertainties “extremely high.” He warned last week that tariffs could affect Japan’s economy through multiple channels, pledging to evaluate economic and price developments through a broad array of indicators. Most economists expect the central bank to delay further rate hikes, with a majority anticipating no change in coming months. 

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What Bloomberg Economics Says…

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“The narrower contraction in Japan’s first-quarter GDP compared with the preliminary reading doesn’t change the broader picture — fragile growth complicates the Bank of Japan’s path toward policy normalization. The shrinking economy aligns with the BOJ’s view that elevated external risks stemming from US tariffs warrant caution.”

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— Taro Kimura, economist

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Click here to read the full report

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Japan is contending with a barrage of US tariffs, including a blanket 10% duty on its goods that will rise to 24% in early July barring a trade deal. Sector-specific levies are proving especially burdensome, most notably the 25% duties on automobiles and auto parts, which are eroding exporters’ profit margins.