Japanese Growth Surges in Q1

Newly-released data for Japan's first-quarter national income accounts showed that the economy grew at a very strong 4.1% rate. This was much higher than expected: Japan's economy was weak in the fourth quarter of last year, growth rates in the overseas economies appear anaemic, and Japan's monthly indicators were mixed at best. Nevertheless, several sectors posted significant gains. Private consumption increased for the fourth consecutive quarter; since personal income showed little change, this perhaps indicates a long-run shift toward lower saving and increased expenditures by households. Government consumption increased, following the pattern of previous quarters as spending on post-quake clean-up continues. But more importantly, government investment rose in the first quarter: this rise in public works had actually been expected in mid-2011, and after repeated delays it now appears that repairs to infrastructure are at last taking place. The trade sector also boosted growth: both exports and imports rose, with the former increasing faster thus yielding an overall gain from net exports. Lastly, fixed investment—both residential and non-residential—declined in the first quarter. This may be partly a correction to excessive growth in the last quarter of 2011, but could also indicate that the long-awaited boom in post-quake capital spending from the private sector might be delayed.

Outlook and Implications

There were no obvious reasons for the strong performance in Japan's first quarter. Interest rates are low, but have been low for years and provide little stimulus in a deflationary economy. Foreign demand remains modest, especially with the troubles in Europe, while household income has risen little. Nevertheless, household consumption remained strong and net exports have risen. There is a chance these positive trends could accelerate in the near term: corporate profits have done well, which should lead to increased capital expenditures; and continued efforts by the government to repair damage caused by last year's earthquake, tsunami and nuclear meltdown will add to growth. Overall, IHS Global Insight expects the 2012 growth rate to be 2.5%, with similar growth rates in subsequent years.