Two economists changed their forecasts for Japan's economy to a contraction in 2024 after a sharp downward revision to first-quarter gross domestic product data, highlighting the Bank of Japan's dilemma in considering raising interest rates.

According to reports on Tuesday, economists at BNP Paribas and SMBC Nikko Securities have significantly lowered their growth forecasts for Japan's economy this year, predicting that 2024 will be Japan's first annual economic contraction since the pandemic in 2020. BNP's Ryutaro Kono predicts that GDP will fall by 0.4% year-on-year, while a team of economists led by SMBC's chief economist Yoshimasa Maruyama believes the decline will reach 0.3%. Previously, both parties predicted that Japan's economy would grow slightly.

The new forecast comes after a government report on Monday showed Japan’s first-quarter GDP contraction deepened to 2.9% from a previous 1.8%. Bank of Japan officials will discuss adjustments to their economic forecasts later this month.

According to a poll conducted last week, a third of economists surveyed expect to see a rate hike at that meeting.

BNP predicts Japan's economy will shrink in 2024

The Bank of Japan is likely to slightly lower its economic growth forecast for this fiscal year to around 0.5% from 0.8% previously, said Yoshiki Shinke, senior executive economist at Dai-Ichi Life Research Institute.

Besides new signs of economic weakness, Governor Kazuo Ueda also has to weigh upside risks to inflation as the yen continues to weaken. The yen hit a 38-year low this week and some economists see the risk of further depreciation if the Bank of Japan keeps its policy rate unchanged on July 31.

Doubts are growing about the potential strength of a rebound in the April-June period, after many had expected a sharp rebound in Japanese auto output after it was temporarily hit in the first three months of the year by a safety certification scandal.

Shinke and Taro Saito of NLI Research Institute forecast that Japan’s second-quarter annualized GDP will be below 2%.

“There is a risk of a rate hike this month, but from the perspective of economic data, it would be an embarrassing move if the BOJ took action,” Shinke said.

The article is forwarded from: Jinshi Data