The Japanese economy demonstrated impressive resilience by growing at an annualized rate of 2.1% during the first quarter of the year, despite the challenges posed by increasing energy prices due to the conflict in Iran. According to the government’s report released on Tuesday, Japan’s real gross domestic product (GDP), which measures the total value of a nation’s goods and services, increased by a seasonally adjusted 0.5% from the previous quarter. This marks the second consecutive quarter of growth, with the annualized figure indicating the potential yearly growth if the quarterly rate persists.
Consumer and business spending played a significant role in driving the better-than-expected growth, alongside increased government expenditure. The preliminary data from the Cabinet Office revealed that private consumption rose 0.3% from the previous quarter, equivalent to an annualized rate of 1.1%. Public demand also saw a quarterly increase of 0.3%. Despite a contraction in the economy last July-September, Japan managed to achieve moderate growth in the October-December period with a 0.2% increase from the previous quarter.
Japan, which lacks natural resources, faces a major hurdle with surging oil prices. The cost of Brent crude, which was about $70 per barrel before the conflict, has soared to nearly $110 per barrel. The closure of the Strait of Hormuz, a crucial passage for oil shipments from the Persian Gulf to Asia, has exacerbated the situation, pushing prices upward. In response, Japan has released some oil reserves and is exploring alternative supply routes.
In the latest quarter, Japan’s imports saw an increase of 0.5%, while exports rose by 1.7%. The country is also dealing with a shortage of naphtha, an oil-related product crucial for manufacturing various items, which has become a hot topic domestically. Prime Minister Sanae Takaichi has vowed to secure sufficient supplies to sustain growth, a move that will likely necessitate significant government spending. According to analysts from the Japan Center for Economic Research, Japan is expected to maintain moderate growth levels, bolstered by investments in artificial intelligence technology and defense.
Naomi Fink, Chief Global Strategist at Amova Asset Management, noted that the diverse demand signals high-quality growth, suggesting that inflation could be spreading. Rising energy costs are contributing to increased prices, and Japan’s robust growth in the first quarter might prompt the central bank to consider raising interest rates, moving away from its long-standing policy of maintaining rates near or below zero. Although Japan’s inflation rate remains lower than that of the U.S., wage growth continues to lag behind the rising costs. Meanwhile, Tokyo’s benchmark Nikkei 225 index, which has recently reached record highs, dropped by 0.6% in Tuesday morning trading.