Japan’s Economy Dodges Recession In First Quarter, Sales Tax Decision Eyed

Japan's economy expanded at the fastest pace in a year in the first quarter, thanks in part to a leap year consumption boost, but analysts say the rebound was not strong enough to dispel concerns over a contraction in this quarter.

With private consumption making only a feeble recovery from last quarter's slump, the data keeps alive market expectations that Prime Minister Shinzo Abe will delay a scheduled sales tax hike next year, analysts said.

The world's third-largest economy expanded by an annualized 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.

Analysts had worried that the January-March period would not produce enough growth to avert recession — defined as two straight quarters of contraction — after stripping out the estimated boost from the leap year.

"Taking into account the effects of the extra day from the leap year, which pushed up the quarter-on-quarter growth rate by 0.3 percentage point, growth is not as strong as the headline number shows," said Hidenobu Tokuda, senior economist at Mizuho Research Institute.

"The GDP data will likely press Abe to decide to delay a planned sales tax hike next year and to roll out additional fiscal stimulus worth at least 5 trillion yen ($45.76 billion). I also expect the Bank of Japan to ease policy further in July given weak growth and tame inflation."

Following the data, Koichi Hamada, an emeritus professor of economics at Yale University and key economic adviser to Abe, reiterated his opposition to the planned tax hike, which he told lawmakers would cause "quite a confusion".

Chief Cabinet Secretary Yoshihide Suga told a news conference after the data that Japan is making steady progress toward beating deflation but private consumption continues to be weak with the effect of a sales tax hike in 2014 remaining.

Weak Consumption

Private consumption, which makes up 60 percent of GDP, rose 0.5 percent, more than double the median market forecast, as households boosted spending on televisions, food and beverages, and recreation, the data showed. But the rebound failed to make up for a 0.8 percent drop in the previous quarter.

Government officials have said the data will be crucial in Abe's decision on whether to postpone a sales tax hike scheduled for next year.

The data also comes ahead of a Group of Seven leaders' summit Abe will host in western Japan next week, where he hopes to foster agreement on the need for global coordination of policies to jump-start growth.

Japan's economy contracted in the final quarter of last year as slow wage growth hurt private consumption, while exports felt the pinch from sluggish emerging market demand and the pain of a strong yen.

Abe raised the sales tax to 8 percent from 5 percent in 2014, which tipped the economy into recession. That led Abe to delay a second tax hike to 10 percent by 18 months.