Japan’s economy grew by a surprisingly higher rate than expected in the 1Q15. According to the statistical office’s latest release, the economy expanded by a SAAR of 3.9% q-o-q, compared to an earlier estimate of only 2.4% q-o-q. Importantly, this positive revision was driven by investments into the economy. Gross fixed capital formation (GFCF) rose by a SAAR of 6.4% q-o-q. Here, investment into plants and equipment saw a significant rise of 11% q-o-q at a SAAR. Private consumption expenditures were rising at a lower SAAR of 1.5% q-o-q, at around the same level as in the past three quarters. It is unclear how sustainable this GDP growth level will be, but it seems quite apparent that growth will have to be supported at a higher rate from private household consumption. It remains to be seen how this will develop as average monthly labour market earnings have not materially improved lately and inflation has fallen back to a level far below the target level of 2%.
Domestic demand has only recently picked up. After last year’s sales tax increase, retail sales continued to be negatively impacted and have only now in April improved, entering growth territory. Inflation rose by 0.6% y-o-y in April, well above average monthly earnings, which again fell by 0.3% y-o-y. Rising inflation has certainly depressed real income and should be considered an important factor that has so far dragged down any possible domestic improvements. It may still take a while before the economy is able to move back to higher growth levels. Importantly, China is also slowing and, given its weight as Japan’s most important trading partner in Asia, this trend will continue to impact the latter’s economy. Positive momentum could, however, come from the rebound in the US and a continued recovery in the Euro-zone.
The current weakness in domestic demand has been overcome in April, after months of considerably declining retail sales. In April they rose by 5% y-o-y, after a decline of 9.7% y-o-y in March and a decline of 1.8% y-o-y in February. Exports increased by 8% y-o-y in April, almost the same level as in March, when exports appreciated by 8.5% y-o-y. Industrial production remained sluggish on a yearly comparison but has also improved from the low levels of recent months, having remained almost flat in April.
The PMI numbers, as provided by Markit, show that the manufacturing PMI in May has improved, moving out of the contraction territory. It rose to 50.8 in May after 49.9 in April. Positively, the very important services sector index rose to 51.5 in May after 51.3 in April.
Given the tentative signs of an improving economy and also taking into consideration the strong 1Q GDP growth rate, the 2015 GDP growth forecast has been raised to 1% from 0.8% in the past month. This is significantly above last year’s level of -0.1%, as reported by the government’s statistical office. In the meantime, it remains to be seen that current investments into the economy will result in sustainable higher private household consumption.