Japan’s economy avoided recession in the first quarter, as private consumption drove gains in an otherwise moribund economy that is still feeling the ill effects of deflation and weak worldwide growth.
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The world’s third-largest economy expanded by an annualised 1.7 percent in January-March, much more than a median market forecast for a 0.2 percent increase and rebounding from a 1.7 percent contraction in the previous quarter, Cabinet Office data showed on Wednesday.
Although big companies have benefitted from the BOJ’s large scale monetary easing and the central bank adopting a series of policies to create a better investment environment, they prefer to hold cash and securities and not follow the prime minister’s plan to increase their investments.
Japan’s economy suddenly doesn’t look quite so gloomy. That led Abe to delay a second tax hike to 10 percent by 18 months.
This week the government approved a 778 billion yen ($7.1 billion) extra budget in response to April’s deadly earthquakes, which prompted factory shutdowns in southern Japan.
But holding off on the sales tax hike would undermine efforts to fix the government’s tattered finances.
“The economy is in a tough situation with the strong yen hurting corporate earnings, stalled wages and a lack of confidence among consumers”.
At this point it would be more of a surprise if the PM made a decision to go ahead with the hike, rather than postpone it: according to a recent survey conducted by Nikkei QUICK, only 14% of Japanese bond investors expect the 2017 Value-Added Tax hike to go ahead as scheduled.
Market participants, meanwhile, are concerned about the possibilities of the Bank of Japan becoming even more aggressive with its monetary easing policy and the government going on a public works spending spree.
The data also showed that private consumption was somewhat resilient to volatile stock markets and a sharp appreciation of the yen.
But sustained growth has been elusive and Abe’s efforts to overhaul the economy have been widely criticised as half-hearted.
Abe may use the next G7 summit on May 27-28, to be hosted in Japan, as the springboard to re-launch Abenomics 2.0.
In January, Japan’s central bank shocked markets with a negative rate policy, which was created to boost lending to people and businesses, but the move was widely criticised as a desperate bid to prop up Tokyo’s faltering economic plan.
“The market’s initial reaction to the GDP data was a slight strengthening of the yen”, said Stefan Worrall, director of Japan equity sales at Credit Suisse.
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Economists at BNP Paribas noted that the rise consumer spending, which drives around 60pc of the Japanese economy, failed to reverse a 0.8pc quarterly decline in the final quarter of 2015.
