Japan’s economy expands as consumers spend before sales tax rise

Increase of 5.9 per cent in first quarter beats expectations, with analysts crediting consumer spending spree ahead of increase in sales tax

PUBLISHED : Thursday, 15 May, 2014, 11:38am
UPDATED : Friday, 16 May, 2014, 1:38am

Japan's economy grew in the January-March quarter at the fastest pace in more than two years as consumers rushed to spend before an increase in the sales tax, while business investment rose in a sign of confidence in the prospects for future growth.

The 5.9 per cent annualised expansion in the first quarter handily beat the average expectation of 4.2 per cent growth in a poll of economists.

It was the fastest expansion since the 10.8 per cent annualised growth in the third quarter of 2011, when the country was recovering from an earthquake and nuclear disaster.

Capital expenditure rose at the fastest pace in more than two years, suggesting the economy could quickly recover from an expected slowdown in consumer spending after the tax increase, as business investment tends to spur job creation and result in higher salaries.

"We expect the economy will contract at an annualised rate of about 5 per cent for [the] April-June [quarter] but will likely grow around the 2 per cent level for July-September," said Taro Saito, a senior economist at the NLI Research Institute.

"The economy is expected to return to moderate growth after a temporary pullback, which is largely in line with the Bank of Japan's scenario.

"It is hard to consider the [central bank] will ease , judging from an economic growth and price increase perspective."

The data also showed Japan's economy expanded for a sixth consecutive quarter, which could ease worries about demand after the April 1 tax increase.

On a quarter-on-quarter basis, the economy grew 1.5 per cent, more than the median estimate of 1 per cent growth.

Private consumption, which makes up about 60 per cent of the economy, rose 2.1 per cent, from the previous quarter, matching the median estimate. That matched a high last seen in the first quarter of 1997, just before the last increase in the sales tax.

Capital spending - which had been a weak spot in the economic recovery - rose 4.9 per cent, more than double the median estimate for 2.1 per cent growth and the fastest expansion since the December quarter in 2011, as companies used increased profits to invest in factories and equipment.

External demand shaved 0.3 percentage point off quarterly growth, less than the 0.4 percentage point subtraction expected by economists.

Some analysts say that if exports remain feeble, the Bank of Japan may be forced as soon as July to expand its stimulus, by ramping up its purchases of government bonds and other assets.