Business / Economy

Japan's unexpected GDP growth in January-March leaves plenty of reasons for caution

Bloomberg, Reuters, AFP-JIJI

The economy unexpectedly grew at an annualized 2.1 percent in the January-March quarter, government data showed Monday, but it is likely to give little comfort to policymakers worried about economic momentum ahead of the looming consumption tax increase.

The biggest driver of the expansion was imports falling even faster than exports, meaning that net exports technically drove growth in the economy. Yet falling imports is actually a sign of underlying weakness in demand, so the result is somewhat misleading.

Another reason for caution is that the figures released Monday offer a preliminary reading of the economy and they are often significantly different when revised results are released weeks later.

Gross domestic product expanded at an annualized 2.1 percent in the three months through March, according to the Cabinet Office. That compares with economists’ median estimate for a contraction of 0.2 percent.

“All of the most important components of GDP are negative,” said Hiroaki Muto, chief economist at Tokai Tokyo Research Center. “The economy has already peaked out, so we are likely to have a mild recession. No one would object to delaying the consumption tax hike.”

The headline GDP expansion was caused largely by a 4.6 percent slump in imports, the biggest drop in a decade and more than a 2.4 percent fall in exports.

As imports fell more than exports, net exports — or shipments minus imports — added 0.4 percentage point to GDP growth, the data showed.

Private consumption slid 0.1 percent and capital expenditure dropped 0.3 percent, casting doubt on policymakers’ view that solid domestic demand will offset the pain from slowing exports.

There have been growing calls from some former policymakers to delay the consumption tax hike in the face of worsening domestic and external conditions.

However, economy minister Toshimitsu Motegi put on a brave face Monday, saying there was no change to the government’s plan to raise the consumption tax to 10 percent from 8 percent in October.

“There’s no change to our view that the fundamentals supporting domestic demand remain solid,” Motegi told reporters after the data were released.

But some analysts warn the economy will continue to face headwinds that could dent growth in coming quarters.

“Consumer spending is likely to remain weak, because wages are not rising that much,” said Kentaro Arita, senior economist at Mizuho Research Institute. “In the second quarter, GDP could be zero or slightly negative because exports will remain weak. This, combined with weakening capital expenditure, means there is a risk of a recession.”

The GDP data comes as the government’s coincident economic indicator recently pointed to the possibility that Japan may be in a recession as exports and factory output were hit by China’s slowdown and the Sino-U.S. trade war.

The latest data were being closely watched amid speculation that weak growth could prompt Prime Minister Shinzo Abe’s government to postpone the consumption tax hike for the third time.

Speculation is also mounting that Abe could use this decision to call a snap election over the summer, combining it with Upper House elections.

However, the strong headline GDP figure may dampen speculation for now.

“For those who want to implement the tax hike as scheduled, today’s data is a tailwind,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

Major business organizations support going ahead with the tax hike, and Chief Cabinet Secretary Yoshihide Suga recently said the government will carry out the plan unless a crisis on the level of the 2008 financial meltdown happens.

The previous consumption tax hike to 8 percent, from 5 percent, in 2014 was blamed for a slump in the economy.