May 20, 2015
Japan’s economy grew at an annualised pace of 2.4 per cent in the first quarter but mainly due to a huge build-up in inventories.
The stock market surged, with the market capitalisation of the Tokyo Stock Exchange’s first section exceeding its 1989 peak, as headline growth in gross domestic product beat analyst forecasts of 1.5 per cent.
But the data were scrambled by the conflicting effects of a surge in inventories and a plunging oil price. After stripping out inventories, the annualised pace of expansion was just 0.4 per cent.
Overall, the report showed a moderate expansion in consumer and business spending, implying Japan’s economic recovery is still on track.
The pace of that recovery will disappoint the government of prime minister Shinzo Abe and the Bank of Japan, however, more than two years after they launched a massive economic stimulus.
“The acceleration in GDP growth last quarter was mostly due to a jump in inventories, and a range of indicators point to a slowdown in the second quarter,” said Marcel Thieliant, Japan economist at Capital Economics in Singapore.
Private consumption and investment both grew at an annualised pace of 1.4 per cent, suggesting the economy is slowly regaining vitality after a drop into recession in the middle of last year.
Growth of 1.4 per cent is higher than Japan’s long-run potential — thought to be less than 1 per cent — so the economy is growing fast enough to soak up spare capacity.
When Japan runs out of underemployed workers, wages and prices should pick up, helping the BoJ reach its goal of 2 per cent inflation. Inflation is currently running around zero because of falling oil prices.
The figures on core areas of domestic demand may be the most reliable part of the report. “I want to emphasise that the report is good rather than bad,” said Masamichi Adachi, senior economist at JPMorgan in Tokyo. “Private demand is strengthening.”
The contribution from consumption and investment added a total of 1.1 percentage points to annualised growth. Strong residential investment chipped in another 0.2 percentage points. Inventories added 2 percentage points.
0.4% annualised pace of expansion, after stripping out inventories
They were offset by a subtraction of 0.3 percentage points from falling public demand, as fiscal stimulus wears off, and a 0.7 percentage point hit from net exports.
Exports, up 2.4 per cent over the previous quarter, were strong. That suggests Japan’s international markets are holding up despite signs of a slowdown in China and disappointing jobs data in the US.
But there was controversy about the figure for imports. Before adjusting for prices, imports were measured as falling by 6.4 per cent over the previous quarter; after price adjustment that became a rise of 2.9 per cent.
Some economists argued that the oil price slump may have distorted the adjustment and exaggerated the rise in imports. That would drag down the overall growth figure.
The Nikkei index was trading up almost 1 per cent at 20,222. The yen was slightly weaker against the dollar at Y120.92.