On a quarter-on-quarter basis, the economy grew 0.5%, again ahead of the 0.4% consensus estimate.
The details were broadly encouraging. Private consumption, which accounts for more than half of Japan’s economic output, rose 0.3%, edging above forecasts of 0.2% and matching the prior quarter’s pace. Capital expenditure grew 0.3%, also beating expectations, while net external demand contributed 0.3 percentage points to overall growth, above the 0.2 point projection. The GDP price deflator held at 3.4% year-on-year, above the 3.1% forecast, underscoring that inflationary pressure was already building before the full force of the oil shock arrived.
The results capture an economy that was, by most measures, on firm footing when Iran effectively closed the Strait of Hormuz in response to US-Israeli attacks at the end of February. That closure sent oil prices surging and triggered fears of severe and prolonged supply disruptions across global energy markets.
Japan is among the most exposed developed economies to that shock. The country imports the vast majority of its oil from Middle East suppliers, meaning surging crude prices feed directly and rapidly into fuel costs, corporate margins and consumer prices. Analysts now broadly expect the second quarter to show a contraction, reversing the momentum the first quarter data reflects.
Analysts said the solid Q1 result provides some cushion but is no guarantee of resilience. If price rises remain the dominant channel of impact, they say, the economy can likely absorb the shock and resume recovery. If supply disruptions become severe and sustained, however, the damage to growth could be significant enough to close the window for BOJ rate hikes entirely.
That scenario presents the BOJ with a dilemma it had not anticipated when it began dialling up hawkish signals earlier this year. Markets had been pricing a meaningful probability of a rate increase at the June meeting, but the darkening growth outlook is forcing a reassessment of whether tightening into a supply-driven slowdown is a risk the central bank is willing to take.
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The stronger-than-expected Q1 print gives the BOJ some cover but does little to clarify its path forward given the severity of the energy shock now bearing down on the economy. Markets pricing a June rate hike will be watching closely for any signal that the BOJ is prepared to look through near-term inflation driven by oil rather than domestic demand, particularly if second quarter data confirms the contraction analysts are warning about
