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Japan's economic contraction in the first quarter has had little impact on the Bank of Japan's economic outlook, as bank officials are focused on how the economy slows in the second quarter amid the state of emergency and self-imposed restrictions, MNI understands.

BOJ economists expected the economy to have been weighed down in the first quarter by weaker consumer spending amid the state of emergency, although production and exports were relatively solid.

The real export index calculated by the BOJ based on trade data rose 1.9% q/q in the first quarter and industrial production rose 3.0% q/q in the first quarter for the third straight quarterly rise, following +5.7% in the fourth quarter.

The focus among bank officials has shifted to how the overall economy will evolve and how face-to-face businesses have been hit by the state of emergency and the suspension of the government's Go To Travel campaign.

The BOJ's baseline scenario is that the economy is likely to follow an improving trend, but the pace of improvement is expected to be only moderate while vigilance against Covid-19 continues.

BOJ economists expect both exports and production to remain firm with a strong manufacturing sector at home and abroad, easing downward pressure on the economy and sentiment from weaker consumer spending.

But they are becoming increasing concerned that the continued weakness in the face-to-face service sector will spill over into soft demand for goods and clothes through Q2 as department stores in big cities remain closed.

There is also a worry that the manufacturing sector could continue to struggle with output if Q2's expected recovery in semi-conductor supply fails to materialise, as that will add further downward pressure on both production and exports. Bank officials still see GDP contracting in Q2, albeit with a less steep decline than seen in Q1.

Japan's economy posted the first contraction in three quarters for the January-March period in the wake of weaker private consumption and slowing capital investment, preliminary GDP data released by the Cabinet Office Tuesday showed.

Q1 GDP fell 1.3% q/q, or an annualized -5.1% following an unrevised 2.8% q/q, or an annualized revised 11.6% for the fourth quarter of 2020.

The Q1 contraction was largely in line with the MNI median forecast that pointed to a fall of 1.3% q/q, or an annualized -5.0%.