May 15,2014,11.00 JST

Q1 GDP gives hope for a sustainable growth

Real GDP grew robustly in the January-March quarter of 2014, expanding by 1.5% quarter on quarter (QoQ). Private consumption grew by 2.1% QoQ, contributing 1.3% points to the overall real GDP growth.

The robust growth in the private consumption was largely expected. Consumers rushed to buy consumer durable goods before the sales tax was raised in April. By category of consumer goods, demand for consumer durables such as vehicles expanded by 13.7% QoQ and demand for semi-durables such as apparel goods expanded by 6.4% QoQ. 

The real good news in Q1 GDP lies outside private consumption. Private capital expenditure grew by 4.9% QoQ, the highest growth seen in the last two and half years. Exports also grew robustly by 6.0% QoQ, similarly the highest growth in the last two and half years. These gains in private capital expenditure and exports are noteworthy. As private consumption is likely to weaken from here on due to VAT hike, it is critical that the gap gets filled by other type of demands. If we are to see the growth in capital expenditure and exports sustained through the rest of 2014, it will greatly soften the negative shock from VAT hike and assure that the Abenomics growth in Japan would be sustained.

There was also a sign that Japan is on a reflation path. Domestic demand deflator Domestic demand deflator rose by 0.7% YoY in the January-March quarter, a highest rate of inflation since 2008. 

Could Japan keep growing even with the VAT hike?   

While the news from the January-March quarter is encouraging, we remain cautious on Japan’s economic outlook in the rest of 2014. We think the loss of momentum in private consumption will be severe. Despite the improvement in the labor market, wage growth has been slow in coming. In March, wages grew by mere 0.7% year on year (YoY), less than the rate of CPI inflation of 1.6% YoY. Moreover, the negative gap between wage growth and inflation is likely to worsen further in April. While we expect inflation to reach 3% YoY in April, wage growth will at most achieve 1.5% YoY in our view. 

Stagnant stock market is also not helping. In 2013, booming equity market helped consumers to spend, but in 2014, equity prices have remained stagnant so far. The negative shock from VAT hike will likely be more persistent than policy makers currently anticipate. While the robust expansion we saw in capital expenditure and exports in Q1 is encouraging, we doubt if the growth would be maintained in Q2. Overseas economies such as China and U.S. are still struggling to grow. Surveys on corporate managers' willingness to invest shows that they are more inclined to invest overseas rather than in Japan. In our view, the weak private consumption is likely to set the growth trend for the rest of 2014. 

In our view, policy makers are likely to be forced to step in to provide demand stimulus measures once the weakness in the economy become apparent toward the summer of 2014.