Japan’s first-quarter GDP revised sharply higher

Japan's gross domestic product (GDP) growth was revised sharply higher in the first quarter, data on Monday showed, however doubts remain over whether the momentum can be sustained.

GDP rose an annualized 3.9 percent in the first quarter, higher than the preliminary reading of a 2.4 percent increase, and up from 1.5 percent in the October-December period.

On a quarter-on-quarter basis, the economy grew 1 percent, higher than the initial reading of 0.6 percent, and up from 0.4 percent in the previous three months.

The upward revision mostly reflects better-than-expected capital spending, which rose 2.7 percent on quarter, far higher than the 0.4 percent preliminary estimate.

"Overall, the GDP report was quite solid – you're looking at strength in capital expenditure, private consumption and residential investment. These are positive signs that the recovery is on track," said Izumi Devalier, Japan economist at HSBC.

Japanese stocks showed only a muted reaction, with the benchmark Nikkei 225 up 0.3 percent in early trade. The yen, meanwhile, slipped 0.1 percent against the dollar.

The data follows supportive comments over the weekend from government spokesman Yasuhisa Kawamura, who said the economy was "returning to a growth orbit" on the sidelines of the Group of Seven (G7) summit.

Other data on Monday showed April's current account balance at 1.3 trillion yen ($10.55 billion), a tenth consecutive month of surplus but lower than a Reuters forecast for a 1.7 trillion yen surplus.

A weaker currency has been boosting income from overseas investment, with the yen touching a more than twelve-year low against the greenback last week.

Can the momentum continue?

Investors should contain their optimism as Monday's data remains "rear-view mirror gazing," warned Mizuho Bank in a note.

Consumer confidence data and machinery orders due later this week will provide a more real-time feel of the economy, the bank said.

Machinery orders – a highly volatile data series - are estimated to have fallen by 2 percent on-month in April, according to Reuters, following a 2.9 percent rise in March.

Marcel Thieliant, Japan economist at Capital Economics expects growth to decelerate in the second quarter.

April economic indicators, in particular household spending, suggest that consumer demand remains shaky, he said. Household spending fell 4.6 percent in April from a year ago, the fastest annual decline since March 2011, when a powerful earthquake and tsunami stuck the country.

"One factor behind this is wages aren't pickup up enough. This is a big headwind for consumer spending," he said.

BoJ outlook

With the outlook uncertain, Thieliant expects that further monetary stimulus is still on the cards.

"Price pressures aren't strong enough to reach the Bank of Japan's target as early as they think," he said.

The Bank of Japan recently pushed back the time frame for achieving its 2 percent inflation target to around April-September 2016, from the current fiscal year, which began in April.

In March, data showed the consumer inflation rate rose just 0.2 percent, excluding the impact of last year's sales tax hike.

"We think they will require more easing in October," he added.

The BoJ has stood pat on policy since last October, when it surprised markets by expanding its massive stimulus program.