According to government figures released on Thursday, Japan’s economy expanded by an annualised 2.7% in the first quarter of this year, exceeding earlier projections of 1.6% made last month.

Reuters questioned economists who predicted 1.9% growth. Shortly after the report’s release, the Nikkei 225 increased by 0.17%, and the Topix increased by 0.2%. The Japanese yen advanced by 0.14% to 139.98 against the US dollar. The GDP grew by 0.7% quarter over quarter, exceeding Reuters’s prediction of 0.5% growth.

Private capital spending, often known as non-residential investment, increased 1.4%, exceeding early government projections of 0.9%. While exports of goods and services fell by 4.2%, private demand increased by 1.2% and domestic demand increased by 1%. According to updated government data, imports also decreased 2.3%.

The positive surprise for Japan’s economic growth comes while equities are still in the spotlight following recent fresh three-decade highs achieved as a result of a weak yen and structural reform measures.

The economy’s factory activity increased for the first time since October 2022, according to a Purchasing Managers’ Index from last week. A six-month stretch of readings below the 50-point threshold that distinguishes growth from contraction was broken by the reading of 50.6.

According to Tim Moore, an economics director at S&P Global Market Intelligence, the most recent PMI print “highlights a decisive turnaround in manufacturing sector performance,” pointing at a revival in Japan’s domestic economic conditions.

As a result, consumer spending increased, offsetting another month of weak export market demand, according to S&P Global.

Focus has also been placed on individual spending. According to a draught of the most recent full-year economic plan, the administration intends to reduce “crisis-mode spending,” local media Kyodo reported on Wednesday.

The strategy also reaffirmed Prime Minister Fumio Kishida’s goals for economic expansion and pay increases as part of his initiative to hasten income redistribution, according to Kyodo.

According to Kyodo, it also includes steps aimed at restoring fiscal health, like pushing businesses to pay greater wages and make further investments in human resources.

The Bank of Japan will meet for two days next week to discuss monetary policy as the country struggles with a high inflation rate that reached 3.4% in April.

According to Oxford Economics Senior Economist Norihiro Yamaguchi, the resilience observed in the Japanese economy as central banks drastically raise interest rates prepare the world economy for a further slowdown may only be temporary.

″[In] the coming months, probably the economy will maintain resilience because there is more room for pent-up demand and more businesses are seeing more opportunity for investment in this fiscal year,” Yamaguchi said.

However, he continued, additional challenges are anticipated due to a delayed impact on foreign issues harming the Japanese economy.

“What is the gloomy outlook for the external environment, is the lagged impact from the past rate hikes from the United States and from Europe,” he said, adding that “it will surely affect the exports later in this year and the first half of next year.”

(Adapted from TradingEconomics.com)

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