The Japanese government raised its projections for economic growth.

On Thursday, the Japanese government marginally revised upward its economic growth forecasts for the current fiscal year, citing the likelihood of external demand more than compensating for sluggish domestic consumption, according to the Cabinet Office.

In its semiannual economic outlook, the anticipated real economic growth rate for fiscal 2023/24 is now set at 1.6%, a modest increase from the 1.3% projected six months earlier. The surge is attributed to external demand contributing 1.4 percentage points to overall growth, driven by a resurgence in inbound tourism and increased automobile production following earlier setbacks due to chip shortages.

However, the government anticipates a slight deceleration in the economic growth rate to 1.3% in the subsequent fiscal year starting in April, reflecting a pronounced weakening in the contribution from external demand and a corresponding resurgence in domestic consumption.

While the fiscal 2024 economic growth projection is slightly higher than the previous estimate of 1.2%, the government foresees a rebound in domestic demand facilitated by planned income tax cuts and the ongoing trend of wage hikes.

Government projections appear somewhat more optimistic than those from private-sector economists, who expect the world’s third-largest economy to grow by 1.5% this fiscal year and 0.9% in the following year.

These growth forecasts play a pivotal role in shaping government policies, including the annual budget for the upcoming fiscal year. The government expects overall consumer prices to rise by 3.0% this fiscal year, factoring in energy subsidies that reduce inflation by 0.6 percentage points. Companies’ increasing ability to pass on costs to customers supports the trend of rising prices.

As the effects of energy subsidies wane, overall inflation is projected to slow to 2.5% for the next fiscal year. Nominal gross domestic product (GDP) is anticipated to increase by 5.5% this fiscal year and 3.0% in the following year, resulting in a record 615 trillion yen ($4.29 trillion) in fiscal 2024, according to government estimates.

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