Japan’s growth holds up despite fall in business investment amid Iran war

Japan’s economy grew at a still solid pace at the start of the year, even after the turbulence in Iran prompted businesses to cut investment.

Real gross domestic product expanded at an annualised pace of 1.8% in the first quarter, down from an initial reading of 2.1%, the Cabinet Office reported on Monday. Business investment was downgraded to minus 0.7% quarter on quarter from 0.3% growth previously.

Economists were predicting a markdown to GDP after a report last week showed Japan’s biggest companies reduced capital spending in the January-March period. The conflict in Iran began to escalate toward the end of that period, with oil prices spiking in early March.

The revised rate still points to a largely resilient economy supported by solid consumer spending and trade, with demand for artificial intelligence-related products providing a key boost for exports. Monday’s report showed that figures for private demand and exports were left unchanged, with consumption rising 0.3% from the previous quarter. Net exports added to growth.

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Overall, the report should keep the Bank of Japan on track to raise interest rates next week, as policymakers have expressed a desire to continue to normalise policy so long as growth stays intact. It remains to be seen how business investment fared as the Iran war deepened, which could still weigh on growth.

“The impact of the Middle East situation didn’t materialise in the first quarter, but it is likely to become apparent going forward,” said Shinichiro Kobayashi, chief economist at Mitsubishi UFJ Research and Consulting. “Given the recent remarks from the BOJ, it appears it is focusing more on curbing inflation, so I expect it to raise interest rates this month.”