Japan's economic growth at the start of the year significantly exceeded market forecasts, providing a basis for the Bank of Japan to consider further interest rate hikes. However, conflicts in the Middle East continue to cast a significant shadow of uncertainty over the economic outlook. Data released by Japan's Cabinet Office on Tuesday showed that real gross domestic product grew at an annualized rate of 2.1% in the first quarter, surpassing the 1.7% growth predicted by economists. The data indicated that both private consumption and corporate investment increased by 0.3% quarter-on-quarter. Net exports also contributed 0.3 percentage points to economic growth, outperforming expectations as well. This quarter's economic recovery momentum emerged before the full impact of the conflict involving Iran became apparent. The robust pace of economic growth may provide policymakers with grounds to believe that the Japanese economy possesses the resilience to withstand rising borrowing costs. This would facilitate the central bank's continued progress toward monetary policy normalization to address inflationary risks. The release of this economic data comes at a sensitive time for Prime Minister Sanae Takaichi's administration, which is striving to maintain support from both the public and investors. Her proposal for a supplementary budget to fund emergency relief measures and extend energy subsidies has been well-received by a populace weary of inflation. However, her wavering stance on the allocation of related funds has also raised investor concerns regarding her fiscal planning.
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