Japan Q1 growth seen marginally up, although at a slower pace

Japan first quarter gross domestic product, due to be released tomorrow, is expected to move marginally up, at 0.5 pct on quarter. However, this would not be sufficient to offset the more than a percent contraction in the last quarter. Last quarter Japan GDP fell 1.1 pct, showing that the aggregate output levels have remained stagnant.

Japan has witnessed sharp volatility in the FX and equity markets, since the start of 2016, following the Bank of Japan’s decision to introduce negative interest rates in to the economy. This has increased uncertainties and dampened investor/consumer sentiment, which would weigh on domestic demand.

Moreover, the appreciation in the domestic currency has hurt exports in a situation where global demand is already weak and fragile. Amongst the high-frequency indicators, retail sales continued to contract sharply in 1Q, household spending rose mildly, while exports growth was close to 0 pct, if measured in real terms.

"For the full year of 2016, we look for 0.5% growth in Japan, the lowest amongst the G3," DBS commented in its research report.

Market expectations hint that the Central Bank will ease further this year, at the June/July meeting. Prior to that, attention will be given to G7 Summit that is scheduled to be held in Japan on 26-27th May, during which PM Abe would seek support for expanding fiscal stimulus to revive economic growth, the report said.