The unexpected 0.5% q/q rise in GDP and the 3% q/q plunge in total hours worked in the first quarter meant that productivity rose at its fastest pace in nearly four years. That makes sense because firms have been responding to capacity shortages and the tightness of the labour market with higher investment spending. Software investment in particular climbed to a record high last year as firms adopted new internet and AI technologies. With business investment set to remain high relative to output, productivity growth will probably remain strong. While that’s positive for Japan’s growth prospects, it will make it even more difficult for the Bank of Japan to hit its 2% inflation target.
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