The Japanese economy is on track to achieve its longest period of continuous expansion since the end of World War II, demonstrating resilience despite challenges such as the war in Iran pushing up oil prices and the Bank of Japan's ongoing efforts to normalize interest rates.
The Japanese government, in its monthly economic report released on Tuesday, maintained its assessment that the economy is "recovering at a moderate pace," indicating that the current expansion is likely to persist. This assessment further strengthens market expectations that the leading index, a composite indicator of key economic data used to forecast trends, will continue to signal expansion.
The leading index for May, scheduled for release on July 7th, is expected to show that the economy has been in an expansionary phase for 72 consecutive months. If subsequent data for June and July also indicate continued growth, the duration of this expansion will surpass the previous record of 73 consecutive months.
Since bottoming out in May 2020 during the pandemic, Japan's economy has gradually emerged from decades of deflation, with prices rising again and wage growth strengthening.
At the start of this year, the economy maintained relatively steady growth, primarily driven by robust consumer spending and strong trade performance. Strong demand for products related to artificial intelligence has been a key driver of export growth. However, the outlook for household consumption remains uncertain. Partly due to historic yen weakness pushing up inflation, household purchasing power continues to be squeezed.
Although wage growth has recently outpaced price increases in recent months, consumer confidence remains below pre-pandemic levels. Furthermore, recent consumer spending has been partly reliant on temporary subsidy measures introduced by Prime Minister Sanae Takaichi, raising questions about the sustainability of the current consumption growth.
Taro Saito, Chief Economist at NLI Research Institute, stated, "The current economic expansion is fragile. While nominal GDP continues to grow, people are not actually becoming wealthier."
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