Japan’s Economy Accelerated in First Quarter

Japan’s economy grew at the fastest pace since 2011 in the first quarter as companies stepped up investment and consumers splurged before the first sales-tax rise in 17 years last month.

Gross domestic product grew an annualized 5.9 percent from the previous quarter, the Cabinet Office said today in Tokyo, more than a 4.2 percent median forecast in a Bloomberg News survey of 32 economists. Consumer spending rose at the fastest pace since the quarter before the 1997 tax increase, while capital spending jumped the most since 2011.

Today’s data add to signs the economy will have sufficient momentum to bounce back from the 3 percentage point levy rise that is set to trigger a contraction this quarter. Such resilience lowers the odds of any imminent extra easing by Bank of Japan and, if sustained, could persuade the government to proceed with a planned further increase in the tax rate.

“Maintaining capital spending growth will be a key factor” in sustaining the recovery, said Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo. “The situation doesn’t warrant additional BOJ easing for now.”

Consumer spending rose 2.1 percent from the previous quarter, the highest since a 2.2 percent increase in the first three months of 1997.

The run-up in demand ahead of the tax rise was more than expected, Economy Minister Akira Amari told reporters in Tokyo today. At the same time, consumer confidence after the levy rise in April fell to the lowest level since August 2011, separate data today showed, pointing to potential challenges ahead.

Business Investment

Capital expenditure increased 4.9 percent, the most since an 8.2 percent jump in the last three months of 2011, in the aftermath of the Tohoku earthquake and nuclear disaster. HSBC Holdings Plc economist Izumi Devalier said a statistical distortion may have pumped up the number.

The Topix stock index was down 0.9 percent as of 2:21 p.m. in Tokyo as disappointing earnings and a stronger yen overshadowed the GDP report. The Japanese currency rose 0.1 percent to 101.84 against the dollar.

The economy will contract 3.3 percent in the April-June period before expanding 2 percent the following quarter, according to a separate Bloomberg News survey conducted prior to today’s data.

BOJ Governor Haruhiko Kuroda said today the central bank looks at GDP data when setting monetary policy, and will make any necessary adjustments to achieve its 2 percent price target.

Tax Hangover

Expenditure soared in March on items such as refrigerators and computers, while vehicle sales rose in the seven months through March before slumping in April.

The hangover from the levy rise is starting for Japanese companies. Firms from Japan Tobacco Inc. to Uniqlo store operator Fast Retailing Co. and electronics maker Panasonic Corp. see weak retail spending in their outlooks.

Beer shipments in April fell 21 percent from a year earlier, the largest fall since at least 2005, after rising 17 percent the previous month.

For Toyota Motor Corp., the nation’s largest company, the decline in domestic demand adds to the carmaker’s challenges as it looks to fend off General Motors Co. and Volkswagen AG for global sales leadership.

Business Spending

The increase in business spending in the first quarter compared with a 1.4 percent expansion in the previous three months. Large companies plan to boost investment 0.1 percent in the year ending March 2015, according to a Bank of Japan survey.

Toshiba Corp. and SanDisk Corp. said yesterday they would invest in a chip-making facility in western Japan. The companies will invest as much as 500 billion yen on converting the plant for production, the Nikkei newspaper reported.

“Capital spending was boosted by demand ahead of the tax increase, and we need to wait for April-June data to see if this trend continues,” said Takeshi Minami, chief economist at Norinchukin Research Institute Co. in Tokyo.

Exports rose 6 percent from the previous quarter and imports climbed 6.3 percent.

The yen’s slide since Abe came to power in December 2012 has inflated the value of imported energy as the nation’s nuclear reactors remain shuttered after the Fukushima disaster in March 2011. Imports were also boosted by increased purchases of foreign goods before the tax hike.

Changes from January to the calculation of exports and imports probably inflated the numbers in both categories, according to a research report from Nomura Inc. economists led by Minoru Nogimori.

Even so, Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, said today’s data show that exports finally seem to be starting to expand.

Public Investment

While public investment fell 2.4 percent from the previous quarter, government cash may have a greater impact this quarter as Abe’s administration expedites spending to lessen the fallout from the tax rise.

The government is pouring 40 percent of outlays for the current fiscal year into the April-June quarter, and will aim to complete 60 percent of projects by the end of September.

A confidence gauge this week indicated the blow from the tax increase may be fleeting, backing up Kuroda’s confidence in the economy’s resilience.

The negative shock from the higher tax “is as we anticipated or even slightly less than we anticipated,” Kuroda said May 5 in an interview with CNBC Television in Kazakhstan.

The government will base a decision on whether to further raise the levy on the resilience of the economy in the third quarter, according to Economy Minister Akira Amari.

Adam Posen, Peterson Institute president and former Bank of England monetary policy committee member, warned yesterday against postponing the plan to raise the levy.

“If they fail to deliver the consumption tax hike in 2015, the negative reaction in equity and currency markets will be enormous, and the credibility of the Japanese government will be massively damaged,” Posen said in an interview in Tokyo.

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