Japan economy grows at 2.1% annual pace, helped by consumer spending

Japan reported growth in the first quarter even as energy prices pressured households and businesses, the government said Tuesday as it released preliminary national accounts. The Japanese Cabinet Office said real gross domestic product rose at an annualized rate of 2.1% in the January-March period, with growth also appearing in quarter-on-quarter figures that came in above the prior stretch of weak performance.

On a seasonally adjusted basis, real GDP increased 0.5% from the previous quarter, a pattern the government described as the second straight quarter of growth. The annualized number is presented by Japan as an estimate of what the quarterly rate would translate to over a year if the same pace continued.

The Cabinet Office attributed the stronger-than-expected result in part to spending by consumers and businesses. It said private consumption rose 0.3% from the previous quarter, and it also pointed to a 0.3% rise in public demand as additional support for the expansion.

Japan’s report also reflected the uneven path of growth in the preceding quarters, after contraction earlier. The government said Japan’s economy contracted in July-September before it posted moderate growth of 0.2% in October-December.

A central challenge for the resource-poor country has been surging oil prices, which have been intensified by the war in Iran and related disruptions to supply routes. The report described Brent crude as trading at about $70 a barrel before the war and as later costing nearly $110 a barrel, after the Strait of Hormuz—described as a key shipping route for Persian Gulf oil—was effectively blocked.

Japan said it has responded by releasing some oil reserves and working on alternate routes. The oil-market strain has also fueled domestic shortages, including a shortage of naphtha—an oil-related product used across manufacturing, from plastics to consumer goods.

Prime Minister Sanae Takaichi said she had promised to focus on ensuring sufficient supplies to help sustain growth, a pledge that the article linked to the likelihood of increased government spending. Analysts at the Japan Center for Economic Research also said Japan will likely manage moderate growth, supported by spending on artificial intelligence technology and defense, according to the report.

In markets, Tokyo’s benchmark Nikkei 225—recently trading at record highs—declined 0.6% in Tuesday morning trading. In comments included in the story, Amova Asset Management Chief Global Strategist Naomi Fink said, “The breadth of demand showed a high-quality growth picture, which may add evidence that inflation is broadening.”

Energy costs feeding into consumer prices are also part of how investors and policymakers are weighing next steps for monetary policy. The report said higher costs for energy are pushing prices higher and that stronger first-quarter growth may tilt Japan’s central bank toward raising interest rates as it moves away from years of rates near or below zero, while adding that wages for workers still lag behind rising prices.