So is Japan’s economy recovering more strongly than expected? At first glance the 2.4% annual growth rate revealed yesterday would tell us ‘yes’.
But it’s not quiet as positive as that because growth was driven by a pickup in inventories. Stripping out that impact and growth is running at an annual rate of around 0.4%, which is about what the US economy grew at in the first quarter.
Headline March quarter GDP grew 0.6% quarter on quarter or an annual 2.4% according to figures issued by the Japanese government yesterday.
Japanese GDP receives a boost from inventories
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The Nikkei was up 0.7% at 20,196.56, a new 15-year high – after GDP report was issued.
That was stronger than the 1.1% growth seen in the December quarter and well above market estimates of 1.5%.
Household spending rose 0.4% on quarter, much higher than the 0.2% increase forecast by the market. While that sounds positive, inventories contributed 0.5% to growth in the quarter. Strip those out and the rise in household consumption was not strong enough to keep growth positive.
An 0.4% rise in investment (which is often revised heavily in the next estimate in a month’s time). That was the first quarterly increase in business spending, so that was a small positive. Consumption and investment contributed a total of 1.1 percentage points to annualised growth. Residential investment (homebuilding) added another 0.2 percentage points.
Disappointingly exports slowed in the quarter, even though the country’s current account surplus has risen strongly. Export volumes have not risen as strongly as the government and Bank of Japan believed they would.
In fact exports grew 2.4% on quarter, down from a 3.2% increase in the December quarter, a big disappointment after two years of a weaker yen and improved outlook for demand and costs, especially as oil costs (and the cost of coal and LNG) have plunged.
Those weaker exports detracted 0.7% from growth in the quarter, which will probably be readjusted a bit in the next round of estimates. But it is a big surprise. Falling government spending also cut growth by 0.3%.
But there were signs in the data that a year after demand was crunched by the tax rise on April 1, 2014, the Japanese economy is at last starting to see its way forward, with some positive signs emerging.
The big task is converting the surge in inventories into higher sales in coming quarters.
