Japan's economy surprised everyone by growing last quarter

  • Japan’s economy grew unexpectedly in the March quarter.
  • The economy expanded by 0.5%, or 2.1% on an annualised basis.
  • Imports fell at the fastest pace since the height of the GFC. Exports also fell at the fastest pace in nearly four years. Put simply, much of the growth reported last quarter was that imports slumped more than exports.
  • Household consumption, the largest part of the Japanese economy, declined during the March quarter. Business investment also weakened over the same period.

Japan’s economy grew unexpectedly in the March quarter, bucking economists’ expectations for a mild contraction.

According to preliminary figures released by Japan’s Cabinet Office on Monday, the economy increased by 2.1% on an annualised basis after seasonal adjustments, a result significantly stronger than the median economist forecast offered to Reuters for a decline of 0.2%.

The result followed a 1.6% seasonally adjusted annual increase in the December quarter that was below the 1.9% pace originally reported.

Between January to March, Japan’s GDP expanded by 0.5% in seasonally adjusted terms, again stronger than the 0.1% contraction expected.

While both the quarterly and annualised growth rates were well above forecast, the details of the report were weak with much of the increase reflecting that imports fell faster than exports in early 2019.

The Cabinet Office said imports slumped by 4.6%, the steepest decline since the first quarter of 2009, indicating a sharp drop in demand.

Exports also fell 2.4%, the largest quarterly decline since the June quarter of 2015.

With imports falling faster than exports, net exports contributed 0.4 percentage points to the quarterly GDP increase.

Inventories also added 0.1 percentage points, helping to offset weakness in other parts of the economy, including household consumption, the largest component of Japanese GDP at around 60%.

Household consumption declined by 0.1 percentage points, in line with market expectations but weaker than the 0.2% contribution made in the final three months of 2018.

Private capital expenditure also softened during the quarter, although the 0.3% fall was far smaller than the 1.7% decline expected.

Public demand made no contribution to growth as weaker consumption was offset by increased investment.

Following the release of the preliminary GDP report, Japan’s economy minister Toshimitsu Motegi said the economy’s fundamentals remain sound, according to Reuters.

Motegi said weakness in private investment and consumption last quarter partially reflected payback after stronger results in late 2018. He also nominated a slowdown in the Chinese economy as one factor behind weaker investment.

Motegi said there was no change in the government’s assessment that domestic demand is improving, nor that there was a need to delay the planned sales tax increase scheduled for October this year.

Japan’s sales tax will be increased from 8% to 10%. The last time it was increased in 2014 from 5%, the Japanese economy fell into recession.

Japan’s economy is the third-largest globally, only surpassed by the United States and China.

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