Japan’s GDP was revised sharply upward, growing 2.7% in the first quarter thanks to strong spending

Japan’s economy grew at an annualized rate of 2.7% in the first quarter of the year, expanding more than a previous estimate of 1.6% last month. Government data showed Thursday.

Economists polled by Reuters had expected growth of 1.9%. The Japanese yen rose 0.14% to 139.98 against the US dollar shortly after the release, while the Nikkei 225 rose 0.17% and the Topix rose 0.2%. On a quarterly basis, the economy grew 0.7%, beating Reuters’ estimate of 0.5%.

Non-residential private investment, or capital spending, rose 1.4% — above the initial government estimate of 0.9%. Private demand rose 1.2% and domestic demand rose 1%, while exports of goods and services fell 4.2%. Revised government data showed that imports also fell 2.3 percent.

The upside surprise to Japan’s economic growth comes as stocks remain in focus after recently hitting new three-decade highs thanks to a weaker yen and plans for structural reforms.

Factory activity in the economy expanded for the first time since October 2022, PMI showed last week. The reading settled at 50.6, snapping a six-month streak of readings below the 50 mark that separates expansion from contraction.

The latest PMI release “highlights a critical shift in the performance of the manufacturing sector,” Tim Moore, director of economics at S&P Global Market Intelligence, said in a research note, pointing to the recovery in domestic economic conditions for Japan.

This helped boost client spending, S&P Global said, offsetting another month of lower demand in key export markets.

Focus has also been placed on private spending. Kyodo local media reported on Wednesday That the government plans to cut “spending in crisis mode”, according to the latest full-year draft economic blueprint.

The plan also reiterated Prime Minister Fumio Kishida’s plans to achieve economic growth along with wage increases as part of his drive to speed up wealth redistribution, Kyodo reported.

This also includes measures aimed at restoring financial health, Kyodo said, such as encouraging companies to offer higher wages and increasing investment in human resources.

The next two-day BoJ monetary policy meeting will be scheduled next week As the country struggles with rising inflation, it hit 3.4% in April.

Chief economist Norihiro Yamaguchi of Oxford Economics said the resilience seen in the Japanese economy as global growth approaches a further slowdown, as a result of sharply higher interest rates by central banks, may be short-lived.

“[In] In the coming months, the economy is likely to maintain resilience because there is more room for pent-up demand and more companies see more opportunities to invest in this fiscal year,” Yamaguchi told CNBC’s “Squawk Box Asia.”

He added that more headwinds are expected due to the delayed impact of external factors affecting the Japanese economy.

“What is the grim view of the external environment, is the lag effect from previous interest rate increases from the US and from Europe,” he said, adding that it “will certainly affect exports later this year and the first half of next year.”

— CNBC’s Lim Hui Ji contributed to this report