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Japanese economy shows signs of improvement, but challenges remain

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A Reuters poll conducted on Friday suggests the Japanese economy contracted at a slightly slower pace than initially estimated in the first quarter (January-March) of 2024. This revision is attributed to upgrades in capital spending figures.

Economists anticipate a return to growth in the current quarter (April-June), fueled by government tax cuts and rising wages.

The revised Cabinet Office data, due for release on Monday, is expected to show a first-quarter GDP contraction of 1.9% annualized, compared to the initially reported 2.0% decline. This translates to an unchanged quarter-on-quarter contraction of 0.5%.

The primary driver for the upward GDP revision is a slight improvement in capital expenditure (spending by businesses on equipment and facilities). The revised data suggests a 0.7% decline, compared to a previously reported 0.8% drop.

Despite the slight positive revision, the Japanese economy still contracted in the first quarter.

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Rising import costs due to a weaker yen are expected to put a strain on consumer spending.

Disruptions in the auto manufacturing industry are also likely to hinder economic growth.

The preliminary data indicated a 0.7% decrease in private consumption during the first quarter, as rising living costs impacted household finances.

External demand, the net effect of exports and imports, is estimated to have subtracted 0.3 percentage points from overall GDP growth.

Separate data from the Bank of Japan, expected on June 12th, is likely to show a 2.0% year-on-year increase in the corporate goods price index (May 2024) compared to the same month last year. This index reflects the prices businesses charge each other for goods.

The slight improvement in the revised GDP figures offers a glimmer of hope for the Japanese economy.

However, significant challenges remain, including rising import costs and disruptions in key industries. Monitoring consumer spending and external demand will be crucial in gauging the future trajectory of the Japanese economy. ~With agency report

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