Japan’s Economy Grows as Investment Gains, Inventories Rise

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Japan’s economy expanded for a second straight quarter, beating forecasts as businesses increased spending and built up inventories after a recession last year.

Whether the 2.4 percent annualized gain in gross domestic product reported Wednesday can be maintained depends on consumers stepping in to buy the products that companies are piling up in warehouses. The median estimate of 28 economists surveyed by Bloomberg was for GDP to grow 1.6 percent in the three months through March from the previous quarter.

Japan’s large, export-focused companies are showing signs of raising wages and unlocking more of their record cash holdings as the weaker yen inflates their profits. While this may be a comfort to Bank of Japan board members who begin a policy meeting Thursday, the level of GDP adjusted for inflation hasn’t recovered from a sales-tax hike last year that sent consumption into a tailspin.

“There is some good news. Companies are slowly becoming comfortable about investing more as their profits rise,” said Yoshiki Shinke, an economist in Tokyo at Dai-ichi Life Research Institute. “The inventory increase isn’t anything positive -- it’s a reminder of the damage done by last year’s sales-tax hike.”

The jump in inventories added 0.5 percentage point to non-annualized expansion in the first quarter, according to government data.

Dai-ichi’s Shinke said that by his calculations, GDP growth would have been just 0.4 percent without the gain in inventory.

Currency Market

The yen weakened 0.2 percent to 120.90 per dollar at 5:50 p.m. in Tokyo. It’s slumped about 30 percent since Prime Minister Shinzo Abe came to power in December 2012 with a new plan to reinvigorate the world’s third-largest economy.

Expansion in the second quarter is likely to be held down by lower auto and steel production and inventory drawdowns, according to Nomura Holdings Inc. economists led by Tomo Kinoshita.

Nomura cut its projection for economic growth for the year through March 2016 to 1.5 percent from 2 percent.

The Japanese have yet to shed fully their deflationary mindset, Economy Minister Akira Amari told reporters in Tokyo.

From the previous quarter, private consumption rose 0.4 percent, the same pace as in the final three months of 2014.

In an illustration of how damaging the April 2014 sales-tax increase was to the economy, GDP adjusted for inflation is still about the same as it was in the April-to-June quarter of 2013.

Capital investment gained 0.4 percent from the previous three months, rising for the first time in four quarters, today’s data showed. Japan’s aging manufacturing facilities and equipment my encourage further spending.

Legacy of Deflation

Nominal GDP, which is unadjusted for price changes, grew an annualized 7.7 percent from the previous quarter, the most since the third quarter of 2011.

The nominal level of GDP remains below its 1997 peak, and about where it was in late 1994 -- a legacy of its decades of stagnant growth and trenchant deflation.

The GDP deflator, a broad measure of price changes, rose 3.4 percent from a year earlier.

The central bank’s favored inflation gauge slowed to zero in February. It picked up slightly in March but remains 1/10th of the BOJ’s 2 percent target. The two-day policy meeting ends Friday.

“The economy isn’t really strong enough to accelerate significantly from here but the GDP report confirms it is picking up,” said Masamichi Adachi, an economist at JPMorgan Chase & Co. “This is supportive for the BOJ as it has expected a moderate recovery. The central bank will reinforce its view that there is no need to ease now.”

Net exports, or shipments less imports, subtracted 0.2 percentage point from non-annualized GDP growth, after a 0.3 point gain in the previous quarter.

“Uncertainties are rising in exports with slowing Chinese economy and a weaker than expected U.S. economy,” Dai-ichi’s Shinke said. “I expect annualized GDP growth will be weaker from April to June than in the first quarter.”

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