Two economists flipped their forecasts for Japan’s economy to show a contraction in 2024 a day after first-quarter gross domestic product data were revised sharply lower, highlighting the Bank of Japan’s quandary as it weighs the case for a rate hike.

Economists at BNP Paribas and SMBC Nikko Securities slashed their growth projections to predict 2024 will mark Japan’s first annual contraction since the pandemic in 2020, according to reports Tuesday. BNP’s Ryutaro Kono predicts GDP will shrink by 0.4% while SMBC economists led by Yoshimasa Maruyama say the retreat will be by 0.3%. Both previously predicted slight expansions.

The new estimates come after the government released a report Monday that deepened the first-quarter contraction to 2.9% from a previous 1.8%. The shifts to economic forecasts will factor into discussions when BOJ board members gather at the end of the month. One in three surveyed economists expects to see a rate increase at that meeting, according to a survey conducted last week.

In light of the revised GDP figures, the central bank is likely to nudge its projection for this fiscal year down to around 0.5% from 0.8%, according to Yoshiki Shinke, senior executive economist at Dai-Ichi Life Research Institute.

In addition to fresh signs of economic weakness, Governor Kazuo Ueda and his board will have to weigh upside risks to inflation as the yen has continued to slide. The currency hit a fresh 38-year low this week, and some economists see the danger of further depreciation if the BOJ leaves its policy rate unchanged on July 31.

There are growing doubts over the likely strength of any rebound in the April-June period. Previously, many expected to see a big bounce after the effects of a safety certification scandal temporarily disrupted auto output in the first three months of the year.

Shinke and Taro Saito of the NLI Research Institute forecast second-quarter annualised growth will be slower than 2% quarter on quarter.

“There is the risk of a rate hike this month but it would be an awkward move by the BOJ if you only look at economic data,” Shinke said.

  - Bloomberg