Asia-Pacific Markets React to Japan's GDP Contraction

Asia-Pacific markets were mixed on Friday as investors reacted to Japan's GDP contraction and awaited other regional economic data. Japan's Nikkei 225 slipped 0.23% after the country's economy contracted 0.2% quarter-on-quarter in the three months ended March, worse than the 0.1% contraction expected by economists. Australia's S&P/ASX 200 rose 0.44%, while South Korea's Kospi gained 0.33%. Hong Kong's Hang Seng index fell 0.66% and mainland China's CSI 300 dipped 0.2%. US stock futures were near the flatline after the S&P 500 posted a four-day rally. Other news included Goldman Sachs lifting its 12-month price target for Asian stocks, Alibaba shares falling over 5% after a profit miss, and Singapore Airlines reporting a record net profit but lower operating profit.

Japan's equities and long-term bonds saw a record 8.21 trillion yen ($56.6 billion) in foreign net inflows in April, driven by investors fleeing U.S. markets amid President Trump's trade tariffs. The inflows were largely driven by institutional investors, with pension funds and asset managers buying equities and reserve managers, life insurers, and pension funds purchasing bonds. Experts expect inflows to slow down as the U.S. softens its trade stance, but still see a positive outlook on Japanese assets due to improved corporate governance and potential for a weaker dollar. Japan's Nikkei 225 rose over 1% in April, outperforming the S&P 500, which dropped by nearly 1%. Analysts believe demand for Japanese assets may remain healthy, driven by diversification away from the U.S. and the Tokyo Stock Exchange's corporate governance reforms, which prioritize shareholder returns.

Japan's economy contracted 0.2% in the first quarter, the first decline in a year, due to a sharp drop in exports, while economists had expected a 0.1% contraction. On an annualized basis, GDP fell 0.7%, more than the 0.2% decline expected. Despite this, domestic demand grew 0.6% and Japan's GDP expanded 1.7% year-on-year, the largest expansion since the first quarter of 2023. The decline comes as Japan is engaged in trade negotiations with the US, with initial talks not yielding a conclusive deal, and experts warning of downside risks to the economy from US trade policies.