Japan GDP shrinks more than expected in Q1 as consumption slows

The Japanese economy shrank more than expected in the first quarter of 2024, hit chiefly by a slowdown in consumer spending amid sticky inflation and sluggish wages, while capital spending also slowed.

Gross domestic product shrank 0.5% quarter-on-quarter in the three months to March 31, government data showed on Thursday. The reading was more than expectations for a decline of 0.3%, and fell sharply from the 0.1% increase seen in the December quarter.

GDP shrank 2% year-on-year in Q1, missing expectations for a contraction of 1.5% and declining from the 0.4% growth seen in the prior quarter.

The weaker GDP figures were driven chiefly by a 0.7% drop in private consumption through the quarter, which was much bigger than expectations for a decrease of 0.2%. Consumption makes up more than 50% of Japan’s economic growth.

Capital expenditure, which had somewhat helped offset weaker consumption over the past two quarters, shrank 0.8% in Q1, reversing a 1.8% rise seen in the prior quarter.

The dismal data signaled that Japan’s growth engines were stalling in the face of sticky inflation and an uncertain outlook for monetary policy.

While wages are expected to increase in the second quarter, especially after several labor unions won bumper hikes, it remains to be seen just how much this will factor into consumption.

Japanese inflation remained sticky, while weakness in the yen also weighed on spending during the quarter. The Japanese currency had consistently hit 34-year lows in the first three months of 2024.

Weakness in the Japanese economy also raises questions over just how much headroom the Bank of Japan has to keep tightening policy. The BOJ had warned during its April meeting that growth was expected to slow and inflation was expected to increase in the coming quarters.