Although a government report released last week shows a strong economic pickup in the first quarter, skepticism remains.

According to the report, the nation’s gross domestic product rose 1.4 percent in the January-March quarter, after allowing for inflation.

The quarterly growth translated into an annualized rate of 5.7 percent.

The market, however, reacted calmly to the reported increase, which settled well within the range of expectations.

The figure may indicate that the economy has bottomed out and is staging a strong recovery.

But in reality, the favorable figures resulted from a questionable sampling method used to collect personal consumption data and will surely be revised downward later. And government expenditures were likely bloated by last-minute spending in the leadup to the March 31 end of fiscal 2001.

The economic growth in the first quarter was led by brisk exports, resulting largely from temporary inventory building in the U.S. These exports are likely to slow because the accumulation of stocks in the U.S. has already run its course.

It is highly likely, therefore, that the rate of Japan’s economic growth will be revised downward for the January-March quarter, with its pace easing substantially over subsequent periods.

Overly encouraged by what appears to be an economic bottoming-out, many stock market participants say Japanese equity prices will continue to rise regardless of U.S. stock adjustments.

But they fail to recognize that Japan’s economic recovery is led by exports and will be adversely affected if the U.S. economy slumps.

Unfortunately, Japan remains dependent on the U.S. for economic activity, and as long as the U.S. economy and stock market remain stagnant, the chances that Japanese stocks will keep rising are nil.

Unfounded optimism about the Japanese economy and stock market will have to be reconsidered sooner or later, making it reasonable to expect stocks to remain in the doldrums until this autumn.

Under the circumstances, investors should assume a defensive portfolio stance at least as their near-term investment strategy.

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