<div><p>JAPAN’S economy grew much faster than expected at the start of the year, supporting the case for further Bank of Japan (BOJ) interest-rate hikes, though the outlook remains highly uncertain due to the Middle East conflict.</p><p>Real gross domestic product expanded 2.1 per cent on an annualised basis in the first quarter, according to a Cabinet Office report on Tuesday (May 19). The reading topped economists’ forecast for a 1.7 per cent increase and marked an acceleration from a downwardly revised growth pace of 0.8 per cent in the previous quarter. Stronger-than-expected private consumption and trade helped power the acceleration.</p><p>The report shows the economy picked up steam in the January-March period, before the full impact of the war in Iran started to play out. The solid expansion gives policymakers scope to argue that the economy is resilient enough to withstand higher borrowing costs as the central bank looks to continue its normalisation of policy and address upward inflation risks. </p><div><div><div><div id="dfp-ad-imu1"></div></div></div></div><p>That’s a move that policymakers may want to make before the indirect impact of the Middle East conflict starts to show more signs of weighing on growth.</p><p>“The government side may become more open to accepting further rate hikes based on these figures,” said Takayuki Toji, senior economist at Japan Post Insurance. “That could leave room for the BOJ to raise rates even before the next GDP release and as early as June or July.”</p><p>Despite the bullish growth figures, the yen edged a fraction weaker against the US dollar after the release. Overnight swaps were largely unchanged, showing around a 77 per cent likelihood that the central bank will hike rates in June.</p><div><div><div><div id="dfp-ad-midarticlespecial"></div></div></div><div><div><div><div></div><div></div></div><span class="border-l border-verticals-btblue pl-2">DECODING ASIA</span></div><h3>Navigate Asia in<br/>a new global order</h3><p>Get the insights delivered to your inbox.</p><div></div></div></div><p>The result comes at a particularly sensitive time for Prime Minister Sanae Takaichi as she looks to keep the public and investors on her side. While her call for an extra budget to pay for emergency relief measures and renewed energy subsidies will be largely welcomed by a public struggling to cope with inflation, her flip-flop on the need for more funding for the measures may feed into uncertainty about her fiscal plans among investors.</p><p>The report showed that private consumption, which accounts for more than 50 per cent of Japan’s GDP, increased 0.3 per cent on a non-annualised basis, exceeding a 0.1 per cent forecast. That was likely supported by government utility subsidies and wage growth finally starting to outpace inflation. Still, consumer confidence has been waning since the war broke out.</p><p>Net exports also supported the economy by more than expected. March trade data showed that Japan’s exports grew at a faster clip as demand in China rebounded.</p><div><div><div><p>SEE ALSO</p><div><div><div><div><div></div></div><div><h3>Japan leads global bond markets lower as inflation fears rise</h3></div></div></div></div></div></div><div><div><div id="dfp-ad-imu2"></div></div></div></div><p>Growth in business investment slowed to a 0.3 per cent gain from the previous quarter. The Finance Ministry’s March corporate survey showed a fifth consecutive quarterly increase in ordinary profits. The global artificial intelligence boom, along with rising demand for digitalisation amid labour shortages, continued to support companies’ appetite for investment.</p><p>On his recent visit to Japan, US Treasury Secretary Scott Bessent spoke of the economy’s strength, hinting that the time was ripe for interest rates to go up. He said the “strong and resilient” fundamentals of Japan’s economy will end up reflected in the exchange rate, and that he has full confidence in the job done by BOJ Governor Kazuo Ueda.</p><p>Still, it remains to be seen how the war in Iran will continue to impact the Japanese economy with no end to the conflict in sight. The BOJ has already halved its growth forecast for the current fiscal year to 0.5 per cemt, while raising its inflation forecast to 2.7 per cent. </p><p>Near-term action may be preferable to a later move that might be criticised should evidence of strain on the economy emerge. Holding off on a hike may also heap pressure on a yen that the government has needed to prop up with as much as US$64 billion of intervention in recent weeks.</p><p>Measures that Takaichi takes to support households dealing with elevated energy prices affected by the crisis in the Middle East should help consumption hold up over the coming months. But economists point to the potential for higher inflation and weaker business confidence to dent growth. </p><p>“With those kinds of support measures, Japan can avoid slipping into negative growth in the second quarter,” Toji said. “But inflation can still weigh on real consumption and investment.” BLOOMBERG</p><div><div><p>Decoding Asia newsletter: your guide to navigating Asia in a new global order. <span class="inline cursor-pointer border-none p-0 font-lucida text-inherit text-xl font-medium italic leading-normal !-tracking-5% text-verticals-btblue !underline outline-none hover:text-blue-500">Sign up here to get Decoding Asia newsletter.</span> Delivered to your inbox. Free.</p></div></div></div>

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<p>Japan's economy grew 2.1% in Q1, surpassing expectations and bolstering the case for Bank of Japan interest rate hikes. Strong private consumption and trade contributed to this growth, despite uncertainties from the Middle East conflict. Economists suggest the BOJ may raise rates as early as June or July, although inflation risks and consumer confidence remain concerns. The yen weakened slightly post-report, and the BOJ has adjusted its growth forecast down to 0.5% for the fiscal year, raising inflation expectations to 2.7%.</p>

- Japan's economy experienced a strong growth rate of 2.1% in the first quarter, exceeding economists' expectations of 1.7%.  
- The positive data on private consumption and trade support the Bank of Japan's potential interest rate increase, despite uncertainties from conflicts in the Middle East.  
- However, concerns over declining consumer confidence and rising inflation may pressure future growth, with the central bank adjusting its forecasts accordingly.

Japan’s faster economic growth offers window for BOJ rate hike