Japan economy grows despite weak exports

Shoppers ride on bicycles on a street in Tokyo. Japan’s economy probably grew the most in a year in the January-March quarter as consumers rushed to spend before a sales-tax increase, a Reuters poll showed yesterday.

Reuters/Tokyo

Japan’s economy probably grew the most in a year in the January-March quarter as consumers rushed to spend before a sales-tax increase, a Reuters poll showed, but persistent weakness in external demand could pose a risk to growth ahead. Analysts say exports could remain a drag on the economy in the current quarter while domestic demand takes a hit from the April 1 sales-tax hike, complicating policymakers’ efforts to drive a durable economic recovery.

Although policymakers say the pullback in demand following the tax rise is so far within expectations, further weakness in exports could raise expectations of fresh central-bank stimulus sooner rather than later to support the economy.

“I expect the Bank of Japan will act in the summer or autumn to sustain price gains as upward pressure on prices from a weak yen will peter out from now on,” said Yasuo Yamamoto, senior economist at Mizuho Research Institute in Tokyo.

“The BoJ’s focus is primarily on prices, but it could act sooner if external demand fails to cushion the expected slump in consumption after April. That would pose a major downside risk to the Japanese economy.”  Gross domestic product likely grew at an annualised pace of 4.2% in the first quarter, according to the median estimate in a Reuters poll of 27 economists. That would mark the sixth straight quarter of expansion by the world’s third-largest economy.

It would also be the fastest expansion since 4.5% growth in the same quarter last year, after Prime Minister Shinzo Abe returned to power pledging to regalvanise the economy with aggressive fiscal and monetary stimulus.  The Cabinet Office will release the GDP data on May 15.

“Abenomics” helped Japan’s economy grow faster than those of its Group of Seven peers in the first half of last year, but it lost momentum in the second half as exports, capital spending and private consumption disappointed.

On a quarter-on-quarter basis, the economy is expected to have grown 1% in January-March, accelerating from 0.2% growth in the previous quarter, the poll showed.

Private consumption, which makes up about 60% of the economy, is seen up 2.1% during the quarter. That would match a high last seen in the first quarter of 1997, just before a similar increase in the sales tax.  Capital spending – which has been a weak spot in the economic recovery – is forecast to have increased 2.1%, the most since it rose 7.9% in the final quarter of 2011 on post-disaster reconstruction.