DBS economists Taimur Baig and Radhika Rao expect Japan’s 1Q Gross Domestic Product (GDP) to grow 1.8% QoQ saar, supported by firm exports and AI- and semiconductor-related investment, keeping their 0.5% full-year GDP forecast on track. However, a return to trade deficit on higher Oil prices remains a key drag on the Japanese Yen (JPY), with Bank of Japan (BoJ) seen delaying rate hikes until July.

Growth resilient while BOJ stays cautious

"Preliminary 1Q GDP, as well as April trade and inflation data, are due this week. GDP growth is expected to remain resilient at 1.8% QoQ saar, up from 1.3% in the previous quarter. Exports stayed firm and industrial production picked up in 1Q, supported by the AI supercycle and rising semiconductor exports. Investment also strengthened, driven by continued AI- and semiconductor-related capex."

"Consumption, however, appears to have softened. Retail sales (including spending by foreign visitors) rose in 1Q, but the BOJ’s consumption activity index, which better captures domestic household spending, pointed to a slowdown."

"Given the solid 1Q performance, our full-year GDP forecast of 0.5% remains on track despite headwinds from the Middle East conflict and higher energy prices in 2Q."

"Separately, April trade data are expected to show the trade balance returning to deficit territory as export growth decelerates while imports pick up. The deterioration in the trade balance, as a result of higher oil prices, remains a key drag on the JPY. Unless oil prices retreat meaningfully, the impact of the Japanese government’s FX intervention is likely to remain temporary."

"April inflation data are expected to show CPI holding steady at 1.5% YoY, helped by government energy subsidy measures. With inflation remaining relatively tame, the BOJ is unlikely to be in a hurry to raise rates at the June policy meeting. We continue to expect a 25bp rate hike in July."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)