Japan posts surprise 1.7% growth in first quarter

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

With private consumption making only a feeble recovery from the 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 annualised 1.7 per cent in January-March, much more than a median market forecast of a 0.2 per cent rise and rebounding from a 1.7 per cent contraction the previous quarter, Cabinet Office data showed yesterday.

Analysts had worried the January-March period would not have the growth to avert recession - defined as two straight quarters of contraction - after stripping out 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 Mr 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 (S$62 billion). I also expect the Bank of Japan to ease policy further in July, given weak growth and tame inflation."

Emeritus professor Koichi Hamada at Yale University and key economic adviser to Mr Abe reiterated his opposition to the planned tax hike, which he told lawmakers would cause "quite a confusion".

Mr Abe said there was no change to his plan to proceed with the tax increase. But he acknowledged that private consumption was weaker than expected since it was hit by the first tax hike in 2014.

A version of this article appeared in the print edition of The Straits Times on May 19, 2016, with the headline 'Japan posts surprise 1.7% growth in first quarter'. Print Edition | Subscribe