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Japan's strong first quarter GDP data pushes stocks to new 15-year high

The fastest quarterly increase in over a year raises hopes that the economy is back on a recovery track
Thursday, May 21, 2015 - 05:50
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Japan's economy grew at an unexpectedly strong annualised rate of 2.4 per cent in the first quarter of this year in real or inflation adjusted terms, the Cabinet Office announced on Wednesday.

Tokyo

JAPAN'S economy grew at an unexpectedly strong annualised rate of 2.4 per cent in the first quarter of this year in real or inflation adjusted terms, the Cabinet Office announced on Wednesday. This marked the fastest quarterly increase in over a year and raised hopes that the world's third largest economy is back on a recovery track.

The 0.6 per cent growth in the first quarter compared with the last three months of 2014 was driven largely by an inventory build-up, however, while personal consumption and corporate capital spending remained relatively weak, analysts noted.

But coming after a 1 per cent overall drop in Japan's GDP in 2014, in the aftermath of a sales tax hike, the size of the quarterly increase in the first three months of 2015 raised market spirits, sending the Nikkei 225 stock index up by 1.1 per cent to a fresh 15-year high of 20,252.66 at one point.

Japan's Chief Cabinet Secretary, Yoshihide Suga said on Wednesday that first-quarter growth data showed the positive movement of the overall economy and that he expected private spending and corporate capital expenditures to recover owing to improving corporate earnings, lower oil prices and wage rises.

The latest GDP data appeared to vindicate the confidence expressed last week by Bank of Japan governor Haruhiko Kuroda when he told the Japanese parliament that economic growth in Japan "is turning positive" and that downward pressure on prices will be seen to have disappeared from April.

Mr Kuroda acknowledged that the effect of last year's national consumption tax hike had been "bigger than expected", but added that the slack in the world's third-largest economy had mostly disappeared, and that the economy was responding positively to the central bank's monetary-easing programme.

The stronger than expected first quarter outturn - markets had expected annualised GDP growth of only 1.5 per cent for the period - may dissuade the BOJ's policy board from further monetary easing when it meets on Friday. But some analysts believe the BOJ could opt to give sentiment a further positive nudge.

This is because personal consumption in Japan has proved stubbornly resistant to attempts by both the BOJ and the government to raise spending, while corporate capital spending has also not responded as well as expected to a sharp increase in companies' export earnings on the back of a weaker yen.

Wednesday's data showed that the recovery in Japan's consumer spending remained slow, as consumption, accounting for around 60 per cent of Japan's GDP, increased by only 0.4 per cent - the same level as in the immediately preceding quarter.

Sales of home appliances such as refrigerators and television sets helped lift consumption's contribution to GDP data, but a number of other consumer-related figures such as household spending and supermarket sales showed a modest upward trend.

Separate data released on Wednesday by the Japan Department Stores Association showed, however, that department store sales jumped by 13.7 per cent in April compared with a year earlier when the dampening impact of the sales tax hike was felt most strongly.

Analysts expect domestic consumption in Japan to recover this year as consumer prices are likely to start declining, they say, owing to lower crude oil prices, thereby helping the economy to stage a domestic demand-led recovery.

"Though external demand is expected to worsen (with demand slowing in China and likely weakness in US demand for motor vehicles), consumption is likely to become the driver for growth this year," Junichi Makino, chief economist at SMBC Nikko Securities Inc told Kyodo news agency.

Corporate capital spending, which the government sees as key to shoring up the economy, gained 0.4 per cent in the first three months of this year, marking the first rise in four quarters, but the growth was small compared with the robust earnings increases recorded by Japanese companies.

"The (negative) effects of the consumption tax hike were bigger than expected," Minister for Economic and Fiscal Policy Akira Amari was reported by Kyodo as saying.

Mr Amari added that capital spending "still shows some weakness", calling on companies to make active investments in order to achieve further economic recovery, which he said is also needed to restore Japan's fiscal health.

Japan's exports meanwhile rose by 2.4 per cent overall during the first quarter, on the back of a recovery trend in the global economy including the United States as well as purchases of goods by foreign tourists visiting Japan, while imports rose 2.9 per cent.