Japan's Unexpected Growth Spurt Comes With Reasons for Caution
The biggest driver of the expansion was imports falling even faster than exports.
(Bloomberg) -- Japan’s unexpected growth spurt in the first quarter masked weakness in the economy just as policy makers prepare to hike the sales tax in October.
Gross domestic product expanded an annualized 2.1%, but the biggest driver was imports falling even faster than exports, which meant that net exports technically fueled growth in the economy. Declining imports is a sign of weakness in demand, so the GDP figure is somewhat misleading.
The economy’s pillars of growth -- exports, capital spending and private consumption -- all declined during the quarter, with exports tumbling 2.4%, the most since 2015. Picking up some of the slack were public spending and rising inventories, neither of which are signs of a strong economy.
Supporters of the tax hike are likely to point to the GDP figure to argue that the hike should go ahead, amid growing concern in Prime Minister Shinzo Abe’s ruling party that it could derail the economy at a time of weakness. Economy Minister Toshimitsu Motegi said Monday there is no change in the government’s plan to raise the tax.
Another reason for caution is that the GDP figure is subject to large revisions. A 2015 study found that Japan’s revisions to year-on-year growth figures were the second-largest among 18 OECD economies. When Abe decided in late 2014 to postpone the sales tax hike the first time, a preliminary GDP figure had shown the economy shrinking 1.6% the previous quarter. The figure was later revised to growth of 0.3%.
"The discussion about the tax hike delay might settle down," said Hiroyasu Ando, senior economist at Sumitomo Mitsui Banking. "But when I look at the numbers closely, they are not strong. Household spending and capital investment are negative, which shows that internal demand during the quarter was sluggish. There are some worrisome factors.”
While capital spending held up much better than expected during the first quarter, slowing global growth--especially in China, Japan’s biggest market--and rising trade tensions have hit corporate sentiment.
What Bloomberg’s Economists Say
"Fiscal stimulus already in the pipeline and last-minute purchases ahead of the sales-tax hike should support growth toward 2Q and 3Q. That said, the trajectory will hinge on how U.S. protectionism and the yen’s exchange rate affect Japan’s exports."
--Yuki Masujima, senior economist
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Japan’s GDP is expected to grow in the second and third quarters, thanks partly to fiscal stimulus, before contracting in the fourth quarter after the sales tax hike takes effect. Economists expect private consumption -- which fell 0.1% in the first quarter -- to pick up ahead of the tax increase.
Yet the outlook for the economy still depends largely on unpredictable external factors, primarily China’s economic slowdown and trade war with the U.S., as well as the threat of auto tariffs being held over Japan’s own trade talks with the U.S.
"I still think that the economy is in a soft patch and risks are on the downside, with high uncertainties over China’s economy and its trade war with the U.S.," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.
--With assistance from Tomoko Sato, Gearoid Reidy and Toru Fujioka.
To contact the reporters on this story: Yuko Takeo in Tokyo at ytakeo2@bloomberg.net;Shiho Takezawa in Tokyo at stakezawa2@bloomberg.net
To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Henry Hoenig, Paul Jackson
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