Japan’s GDP Falls: What Does this Mean for the BoJ?
It is no secret that Japan’s economy has weakened over the past couple of months. The country slipped into a recession and in February whereas Japan was initially considered the world’s third-largest economy, it was dethroned by Germany to become the world’s fourth-largest economy.
This weakening persisted over the first quarter of 2024 as revealed in the recent Gross Domestic Product (GDP) data.
Let’s take a look at the figures and what they might mean for the Bank of Japan (BoJ) and the Asian markets:

Is Japan’s Economy Falling Faster-than-Expected?
On Thursday, May 16, 2024, Japan’s Q1 GDP was released, giving traders, consumers, and monetary-policy makers much-needed insights into the state of one of the world’s largest economies.
GDP is a measure of a country's economic health as it can reflect the value of goods and services produced, created, and offered within a country’s borders. As such, this measure can be important and can affect both the financial markets and the economy as a whole.
The recent GDP data, perhaps unsurprisingly, revealed that Japan’s economy is still weakening, continuing the trend it experienced over the past couple of months. However, it seems that the decline came at above-expected levels and faster than anticipated. This is because whereas Reuters and QUICK economists expected a drop of 1.5% in Q1 2024, the actual results showed an annualized decline of 2% from the preceding quarter. In other words, Japan’s economy contracted by 0.5% on a quarterly basis whereas economists expected a 0.4% contraction.
The data also revealed that Japan’s exports dropped by 18.7%, imports dropped by 12.8%, private residential investment declined by 9.8%, and corporate investment lost 3.2%. Likewise, private consumption, a major component of the Japanese economy (comprising about half of it) dropped by 0.7% vs. the expected 0.2%. This, in turn, marked the country’s fourth consecutive drop and “longest streak since 2009.”
Additionally, consumption experienced its fourth consecutive quarterly decline due to higher inflation which exceeded wage growth. According to economists like Atsushi Takeda from Itochu Research Institute, “consumption was weaker than expected, with large falls in durable goods.”
What’s Driving Japan’s Economy Downward?
There are a plethora of factors affecting Japan’s economic growth, the main ones being the Noto earthquake which hit Japan on New Year’s Day and affected operations in some Japanese corporations such as Toyota, higher living costs, lower consumption, and economic uncertainties along with rising inflation.
All of these factors drove the Japanese economy downwards and weakened the Japanese yen hitting a 34-year low last month and notably weakened against the US dollar.
What Do Analysts Think?
Despite the less-than-rosy data, it’s not all doom and gloom for Japan’s economy as noted by economist Takeda, capital expenditure is poised to increase throughout the year due to stronger corporate investment plans. Takeda also expects GDP to “return to positive growth.”
Other economists like Yoshima Maruyama from SMBC Nikko Securities stated that Japan’s economy “will certainly rebound this quarter thanks to rising wages although uncertainty remains on service consumption.”
Nonetheless, it is important to keep in mind the fact that these are all predictions and the actual economic trajectory of this country is still blurry.
What Does It Mean for the BoJ?
The latest data seems to only complicate the BoJ’s decision which now needs to raise interest rates yet again in order to combat the less-than-favorable conditions. This comes despite the fact that this central bank has already raised interest rates in its latest meeting in March, which was the first time the BoJ hikes rates since 2007.
Nevertheless, according to some analysts like Yoshimasa Maruyama “it would be possible for the timing of rate hikes to be pushed back depending on how the GDP may rebound in the current quarter.” (Source: Yahoo Finance)
How Are the Markets Reacting?
Despite the weak GDP data, many Asian indices and stocks rose on Thursday mainly driven by a positive US CPI report from Wall Street which indicated that the Federal Reserve may be closer to rate cuts.
As a result, Hong Kong’s Hang Seng (Hong Kong 50) and the MSCI soared by 0.9% and 1.44% respectively on Thursday. Whether or not this momentum will be sustained is yet to be seen.
What else does the future hold for Japan’s economy? What does it mean for the BoJ’s upcoming meeting on June 13-14? Only time will tell.