Japan GDP Jumps Most in Year as Consumers Open Wallets

Japan’s economy expanded the most in a year last quarter as consumer spending and export gains outweighed the weakest business investment since the wake of the March 2011 earthquake and tsunami.

Gross domestic product rose an annualized 3.5 percent, a Cabinet Office release showed in Tokyo. Private consumption, making up 60 percent of GDP, contributed 2.3 percentage points to the jump. The Bank of Japan may upgrade its assessment of the economy after a May 22 policy meeting, according to people familiar with the central bank’s discussions.

Today’s report shows while consumers -- aided by a stock-market surge -- are responding to the reflation campaign mounted by Prime Minister Shinzo Abe and Bank of Japan chief Haruhiko Kuroda, companies remain cautious. That may change as the yen’s 21 percent slide against the dollar in the past six months spurs profits and Abe embarks on reducing regulations hampering the world’s third-biggest economy.

“Japan is clearly back from stagnation last year,” said Naoki Iizuka, an economist at Citigroup Inc. in Tokyo. “The key from here is whether Abe can unveil a strong growth strategy. If he succeeds, that will boost business investment to support growth.”

Abe plans next month to unveil his so-called third arrow of structural reform, following the first two arrows of monetary and fiscal stimulus.

Exceeding Estimates

Annualized real growth exceeded all but two of 36 estimates in a Bloomberg News survey. Nominal GDP, which is unadjusted for changes in prices, rose 1.5 percent, also the most in a year. The nominal gain was 0.4 percent from the previous three months, less than the median forecast for a 0.5 percent increase.

Japan’s advance comes after the Chinese economy unexpectedly slowed in the first quarter and a recession in the euro area extended to a sixth quarter, the longest decline since the founding of the single currency in 1999. In the U.S., growth picked up to a 2.5 percent annualized rate.

In Tokyo, the central bank may alter the wording of last month’s assessment of the economy -- that it has “stopped weakening and has shown some signs of picking up” -- as evidence mounts that domestic demand is strengthening, according to the people, who asked not to be named because BOJ discussions are private.

Still, not all the signs are positive. The so-called GDP deflator, a broad measure of prices across the economy, tumbled 1.2 percent in the first quarter from a year earlier, the most since the final three months of 2011, underscoring Kuroda’s challenge as he seeks to end more than a decade of entrenched deflation.

Printing Money

The BOJ’s plans to double the monetary base, a measure of the supply of money in the economy, have helped the yen weaken 16 percent against the dollar and 14 percent against the euro this year, the largest declines of the 16 major currencies tracked by Bloomberg News. The currency was down 0.4 percent today, at 102.66 per dollar as of 11:57 a.m. in London.

The Nikkei 225 Stock Average has climbed almost 45 percent this year, more than twice the gain in the Standard & Poor’s 500 Index. Meantime, bonds have tumbled as inflation expectations have risen. Ten year government bond yields jumped the most in almost a decade until the BOJ yesterday announced a 2.8 trillion yen ($27 billion) infusion of funds.

“Some say Japanese stocks may be too high but the GDP shows the strength of economy may justify the uptick trend in stocks,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute. “I see a chance that Japan will have even better growth this quarter.”

Investment Drag

Dragging on growth for a fifth straight quarter, private non-residential investment subtracted 0.3 percentage point from annualized real GDP. The level of business investment in January-to-March was the lowest since the second quarter of 2011. Companies also drew down inventories last quarter, taking 0.8 percentage point off GDP.

Aggregate net income for the 201 companies in the Nikkei 225 Stock Average who have announced earnings for the three months through March rose to 2.57 trillion yen, a 51 percent increase on the year, according to data compiled by Bloomberg.

Housing is seeing a rebound as the central bank injects liquidity and purchases Real Estate Investment Trusts as part of its efforts. Residential investment reached the highest level in four years, today’s report showed.

A gauge of condominium sales in the Tokyo metropolitan area jumped 48 percent in March from a year before. Residential land prices in the nation haven’t risen on an annual basis since 1991, according to an index compiled by the Japan Real Estate Institute.

Boosting Spending

Department store spending rose to the highest in a year in March, with consumer confidence climbing to a level previously seen almost six years ago. Seven & I Holdings Co., the owner of the 7-Eleven convenience-store brand, says a weaker yen and extra stores will boost profit to a record this year.

Strengthening consumer sentiment may help Abe as he campaigns ahead of a July election for the upper house of parliament, where his Liberal Democratic Party is currently in a minority. Abe swept to office for the second time in lower house elections in December, on a platform of reflation that he sought to deliver on in March by putting stimulus-advocate Kuroda in charge of the BOJ.

The central bank said April 4 it would double its purchases of government bonds to more than 7 trillion yen a month to achieve 2 percent inflation in two years. The government announced 10.3 trillion yen in extra spending in January to stimulate an economy that shrank for two quarters last year.

Price Declines

Japan’s struggle with deflation has had echoes abroad, with the U.S. and Europe seeing smaller gains in consumer prices. In the euro area, inflation slowed to 1.2 percent in April, the region’s statistics office said, confirming an initial estimate. The U.S. consumer price index slid 0.3 percent from March, a government report is forecast to show today.

The U.S. will announce initial jobless claims for the week of May 11 after a decline the previous week to an almost five-year low. Housing starts in the U.S. may have fallen 6.4 percent in April from the previous month, according to the Bloomberg survey median.

In China, foreign direct investment rose 0.4 percent in April from a year earlier, the third monthly advance. Other economic data releases on tap today include Israel and Norway GDP figures for the first quarter.