Japan has recorded its longest run of sustained growth in more than a decade as stimulative policy and a healthier global economy lead to a period of robust progress.
Growth for the first quarter of 2017 came in at an annualised 2.2 per cent, according to the Cabinet Office, marking five quarters of continuous expansion in gross domestic product.
The figure beat the consensus analyst forecast of 1.7 per cent and is far above Japan’s long-run growth potential of roughly 0.7 per cent. That suggests the economy is using up spare capacity and unemployment will keep on falling.
Sustained expansion signals the Japanese economy has regained its momentum following the consumption tax rise of 2014 and emerging market weakness in 2015 that led to a prolonged slowdown.
The data will boost the government of Prime Minister Shinzo Abe and give Bank of Japan governor Haruhiko Kuroda renewed hope of eventually hitting his 2 per cent inflation objective.
“It was basically in line with our expectations,” said Masamichi Adachi, economist at JPMorgan in Tokyo. “The real side of the economy is in a very nice state.”
But he pointed to a drop-off in nominal growth — the size of the economy without adjusting for prices — which fell by an annualised 0.1 per cent because companies did not pass on higher import costs to consumers. That highlights Mr Kuroda’s struggle to generate inflation, with headline consumer prices up by just 0.2 per cent on a year ago in April.
“The real side is good but still the nominal side is vulnerable,” said Mr Adachi. “There is a tug of war between the pull from growth on one side and the deflationary mindset in the corporate and household sectors on the other.”
Growth was well-balanced across the economy with consumption and exports the biggest driving forces. Net exports contributed 0.6 percentage points of the total, highlighting how weakness in the yen since the election of Donald Trump as US president has boosted Japan’s economy.
The yen weakened from a range around ¥100-105 to ¥110-115 against the dollar following Mr Trump’s election. It traded 0.4 per cent weaker at ¥111.3 following the GDP data.
Consumption contributed 0.8 percentage points to the total. Persistent weakness in consumer spending has been one of Japan’s biggest problems in recent years. The pick-up suggests consumers may finally be gaining confidence that higher wages will last, an encouraging sign for the BoJ.
“The savings rate has stayed high, chiefly due to the slump for durable goods from the consumption tax hike in April 2014, but it appears to finally be normalising,” said Takeshi Yamaguchi, economist at Morgan Stanley in Tokyo.
Residential investment, business investment and government consumption each contributed 0.1 percentage points to growth. However, public investment — which was expected to rise given fiscal stimulus plans announced by the government last year — came in flat.
Inventory growth contributed 0.4 percentage points to the total. By its nature, inventory growth cannot continue forever, suggesting the true pace of underlying growth in Japan’s economy is running a little below an annualised 2 per cent.