Japan's Economy Shrinks 1.8% in Q1, Hit by Weak Exports, Consumption, and Vehicle Testing Scandal

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Japan's Economy Shrinks 1.8% in Q1, Hit by Weak Exports, Consumption, and Vehicle Testing Scandal

The Japanese economy contracted at an annual rate of 1.8% in the first quarter of 2023, slightly better than the initial estimate of a 2.0% contraction. The revision was due to private sector investments, which were revised upwards from -0.5% to -0.4%.

Seasonally adjusted real gross domestic product (GDP), a measure of the value of a nation's products and services, remained in negative territory, as exports and consumption declined from the previous quarter. Quarter-to-quarter, the economy slipped 0.5% in the January-March period.

Wage growth has been slow, and prices on imports have risen amid a decline in the Japanese yen against the U.S. dollar. The weak yen has boosted tourism but made imports more expensive. Sluggish consumer spending has also been a drag on the economy.

Another negative is the ongoing scandal involving improper vehicle model tests at several major automakers, including Toyota Motor Corp. Government officials raided the headquarters of Honda Motor Co. and media reports said a raid was coming soon on Mazda Motor Corp. Toyota and Suzuki Motor Corp. have already been raided.

Investors are also watching closely for the next action from the Bank of Japan, whose monetary policy board meets later this week. The central bank raised interest rates earlier this year for the first time since 2007, but only to a range of zero to 0.1% from minus 0.1%.

Unemployment has stayed relatively low in the world's fourth largest economy at about 2.6%. Japan suffers a serious labor shortage, as its birth rate continues to drop, hitting a record low last year. The number of marriages have also fallen.

Such demographic trends could prove more dangerous in the long run, according to some analysts, who worry Japan is especially weak in per capita output, and its dimming clout on the global stage might even lead to security risks. Japan's GDP is expected to slip to No. 5 in magnitude after the U.S., China, Germany and India next year, according to the IMF.