Japan is the world’s third-largest economy, following the U.S. and China. Since most forecasting groups have been raising their 2018 and 2019 global economic projections, it stands to reason that Japan will also benefit from the improved international economic outlook.

For example, the OECD recently increased its projections for Japan growth to 1.5% this year before slowing to 1.1% growth next year. Continued growth is predicated not only on the world outlook, but also on the expansion of strong exports into Asian markets.

Japan has always had a concern that the economy could fall back into a deflationary spiral, and the central bank still desires to attain a stable 2% inflation rate.

As matters currently stand, underlying inflation and inflation expectations are still quite low, which is why the government and the central bank argue that further stimulus may be needed to achieve its inflation target. Of course, Japan’s economy has a heavy reliance on international trade, thus the risk of trade protectionism spreading from the U.S. to other important markets remains a critical concern.

As to the short-term situation, Japan’s economy contracted in the first quarter of 2018, suggesting to some that the economy has reached a peak after its best run of expansion in decades.

The economy shrank by 0.6% on an annualized basis, somewhat worse than consensus expectations for the quarter. Of course, Japan has had five years of heavy monetary stimulus, so the concern is that the central bank has little new ammunition to boost Japan’s economic growth. 

Nonetheless, real GDP in Japan expanded 1% in the first quarter of 2018 over the same quarter of the previous year. Economic growth lost some momentum in Q1 (it declined from the previous quarter) as higher inflation and low wage increases weighed a bit on consumer spending.

Moreover, industrial production lost some steam in Q1, while business confidence among large manufacturers moderated for the first time in over two years.