According to the report on May 16 on the website of Fortune magazine, the Japanese economy may get rid of deflation but fall into stagflation.

At the beginning of this year, Japan seems to have walked out of the decades long economic downturn. The stock market boom, wage rise and the first interest rate hike in 17 years made investors and economists believe that the Asian economy has finally ushered in a turnaround.

But weak economic growth is testing this optimism. On Thursday, the Japanese Cabinet Office released a preliminary estimate of gross domestic product (GDP) growth, announcing that the Japanese economy will shrink by 2% at an annual rate in the first three months of 2024.

Japanese officials believe that the reason for the more serious economic downturn than expected is the temporary impact caused by factors such as interference in the supply of the automobile industry. At the end of last year, Toyota's Dafa Motor Company suspended production after it was exposed that there was a problem of false detection data. The company only fully resumed production last week.

However, economists believe that Japan's economic downturn may be caused by factors deeper than supply shocks.

"The most worrying thing is private consumption," said Stefan Onrik, an economist at Moody's Analytics. Japanese household consumption fell 0.7% compared with the previous quarter.

Gao Zechun, an economist of HSBC, and Frederick Neumann said in a research report on Thursday that corporate spending was also weak, down 0.8% from the previous quarter, indicating that "the foundation for private sector recovery is still weak".

Last year, Japanese prices rose by 3.2%, the largest increase since 1982. Since then, inflation has cooled, but the growth rate is still higher than income growth. HSBC reported that real wages had declined for two consecutive years.

Weak economic growth and rising prices are causing people to worry about stagflation. "The growth has almost stagnated, while the inflation rate is very high," said Taro Saito, head of the economic research department of the Nissen Basic Research Institute.

Due to the slow economic growth, it becomes complicated whether and when the Bank of Japan will raise interest rates again to control inflation. Ai Dang, chief economist of Lotte Securities Economic Research Institute, said: "In this case, (the central bank) cannot immediately raise interest rates again."

The Bank of Japan raised the interest rate to 0 to 0.1% in the middle of March, and cancelled the negative interest rate system. The officials of the central bank said that the reason for the decision to raise interest rates was the success of wage negotiations. The Japanese trade union obtained the largest wage increase in more than 30 years through negotiations.

If Japan decides to postpone the interest rate increase, another problem may arise: the weak yen.

As Japan's interest rate is still much lower than that of the United States, the yen exchange rate fell to a record low. The weak yen has led to cheaper exports and more expensive imports. This is good for export-oriented industries such as tourism and automobile manufacturing, but bad for families and industries relying on imported raw materials.

Japanese companies began to worry about the consequences of the continued weakness of the yen. According to the Nikkei Asia magazine, large Japanese catering companies are now opening stores overseas to get rid of the impact of the weak yen. (Compiled by/Xiong Wenyuan)