Japan’s economy grew quicker than estimated in first quarter

Account surplus of 750 billion yen is up 100% on last year

Japan’s current account surplus doubled in April from a year earlier, and the economy grew at a much quicker pace than previously estimated, an encouraging sign for the government’s aggressive policies to stimulate growth even as recent market turbulence raised doubts about its strategy.

Data today showed the world's third-biggest economy grew at an annualised 4.1 per cent rate in January to March, better than the initial estimate of 3.5 per cent, underlining a steady recovery on a pickup in global demand and bold stimulus policies by prime minister Shinzo Abe.

The current account surplus stood at 750 billion yen (€5.7 billion), up 100.8 per cent from a year earlier and much bigger than a median market forecast of a 320 billion yen surplus, data from the Ministry of Finance showed.

Hefty income gains including returns from Japanese investments abroad, which were boosted by a weak yen, more than made up for trade deficits, with income balance posting a record amount in comparable data going back to 1985.


"Exports are gradually recovering as overseas growth picks up, so that's a positive sign," said Junko Nishioka, chief economist at RBS Securities Japan. "But the growth in exports isn't strong enough to offset the rising import costs."

Similarly, the strong gross domestic product (GDP) data also contained some signs of caution.

"Capital expenditure is still contracting, showing that even though corporate profits are improving, companies are worried about the outlook," said Shuji Tonouchi, senior fixed-income strategist ay Mitsubishi UFJ Securities. "There are concerns about the impact of the sales tax hike on economic growth."

The latest data come as volatile markets are casting a cloud over ‘Abenomics’, a policy prescription of sweeping monetary and fiscal expansion aimed at stimulating the economy.

The Bank of Japan (BOJ) will consider taking further steps at a two-day policy meeting ending tomorrow to curb volatility in the government bond market, sources said, as sudden spikes in yields threaten to undermine its objective to pull the economy out of nearly two decades of deflation.

Hopes for the BOJ’s steps helped push up Japanese government bond prices on Monday. The better GDP data also helped buoy Tokyo shares, where the Nikkei average soared 4.9 per cent, its biggest one-day gain since March 2011, mostly as a result of better US labour market report. Job figures on Friday eased growth concern but were not seen as strong enough for the Federal Reserve to scale back its massive stimulus.

Positive mood

The effects of a weak yen have had a bigger impact on boosting the cost of imports than driving export growth, posing a challenge to Mr Abe’s ambitious goal of putting Japan on a sustainable long-term growth track.

However, there are encouraging signals for the economy.

Bank lending rose 1.8 per cent in May from a year earlier, the biggest annual increase since August 2009, in a sign the Bank of Japan’s ultra-loose monetary policy is prompting companies to spend more.

Underscoring a positive mood generated by ‘Abenomics’, Japanese consumer confidence improved for a fifth straight month in May, a government survey showed, pointing to firm private consumption. The government raised its view on consumer confidence, saying the sentiment is improving.

Separate survey from the Cabinet Office showed Japan’s service sector sentiment index fell for a second straight month in May, and its outlook index also dropped amid concern about a rise in energy costs and a fall in share prices.

For decades, Japan had accumulated solid current account surpluses, but the surplus for 2012 more than halved from a year before to 4.7 trillion yen, the smallest on record.

Abe’s growth strategy unveiled last week - ‘the third arrow’ of his three-pronged policies aimed at stimulating the Japanese economy - has failed to impress investors seeking bolder reforms including corporate tax cuts and higher labour mobility.