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Japan's economy grows at fastest pace in nearly 3 years

Japan's economy grew at an annualized pace of 5.9 percent in the first quarter, posting its fastest growth in almost three years as a rise in consumer spending ahead of an April sales tax hike boosted activity, data on Thursday showed.

The number was well above analyst expectations in a Reuters poll for a 4.2 percent rise. Measured on a quarterly basis, Japan's economy grew 1.5 percent, beating expectations for a 1 percent increase.

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"A 5.9 percent increase means that people have not been buying only toilet paper, they've been buying all sorts of things and a lot of things," said Martin Shulz, a senior economist at the Fujitsu Research Institute in Tokyo.

"They are not just storing things but preparing a big consumption binge which helps the economy," he told CNBC.

Shoppers and tourists walk through a shopping street in front of the Sensoji temple in Tokyo, Japan.
Tomohiro Ohsumi | Bloomberg | Getty Images
Shoppers and tourists walk through a shopping street in front of the Sensoji temple in Tokyo, Japan.

Japan raised its consumption tax to 8 percent from 5 percent in April. While a ramp-up in spending before the tax hike boosted the economy in the first quarter, economists have anticipated a slowdown in growth in the months ahead as the consumption tax bites.

Read MoreChina, Japan key threats to Asia's economic outlook: IMF

Still, the first-quarter GDP data may suggest that Japan's economy is in better shape than anticipated to whether the impact of the tax increase.

"So far, much of Abenomics has been dependent on money printing, on the action of the central bank and a weaker yen, but what we are seeing now is really strong consumer demand and business has been pulled forward as well," said Shulz.

"Everybody is counting on the central bank coming in this year again when the economy is slowing, but so far it looks strong and the second quarter will not see a big drop as the 6 percent we are seeing in terms of the jump right now," he added.

The blue-chip Nikkei stock index opened down 0.9 percent in early trade, while the yen firmed to its strongest level in almost a week, trading at about 101.70 per dollar.

Read MoreThe second opening of Japan

"The numbers are stellar (but) they are polluted due to the consumption tax increase, " said Paul Krake, founder of View from the Peak: Macro Strategies.

"There was a lot of front-loading that went into the data but the reality is, the number this big is actually bad news for asset prices going forward because it stalls policy momentum," he added.

The Bank of Japan has pumped cash into the economy over the past year to help weaken the yen, engineer a turnaround in the world's third biggest economy and end deflation.

Many analysts have been expecting further monetary stimulus to help the economy offset the impact of the consumption tax hike.

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