U.S. News

Japan's First-Quarter Economic Growth a Tad Below Expectations


Japan's economy lost a little steam in the January-March period on a downturn in capital expenditure, reaffirming the market view that the Bank of Japan will hold off on raising rates at least for the next few months.

Gross domestic product, the broadest measure of the economy, expanded 0.6% in January-March from the previous quarter, government data showed on Thursday, falling just short of a consensus forecast for a 0.7% increase.

Euroyen futures inched up and the yen weakened slightly after the data, which came hours before the central bank ends a two-day policy meeting. No policy change is expected at the meeting.

Japan's GDP grew at an annualized rate 2.4% in the quarter, marking the ninth straight quarter of expansion, but was slower than a revised 5.0% rise the previous quarter.

"In a word, the figures confirm that the Japanese economy is continuing a recovery led by private demand, and that it's just half a step away from emerging from deflation," said Naoki Iizuka, senior economist at Mizuho Securities.

Exports and personal consumption remained firm but capital expenditure fell for the first time in five quarters, leading to the somewhat weaker-than-expected overall growth.

"I'm worried about the fall in capital spending, particularly after seeing a big drop in machinery orders data this week," said Takeshi Minami, chief economist at Norinchukin Research Institute. "The result of capital spending could affect the Bank of Japan's decision in setting its interest rates," he said.

Still, growth in the world's second-largest economy outperformed the 1.3% annual rate of growth recorded in the same quarter in the United States.

December euroyen futures rose as high at 99.105 from around 99.090 before the data's release. The dollar rose to 120.78 yen from around 120.70 yen, edging towards a three-month high of 120.84 yen hit on Wednesday.

Japan's economy has been expanding since early 2002 and is enjoying its longest period of growth in the postwar era, albeit at a slower pace than previous booms.

With the economy growing steadily, the BOJ scrapped its zero interest rate policy last year and raised the key overnight call rate target to 0.25% last July. 

In February, it nudged rates up again to 0.5%, though that is still the lowest level among major industrialized nations. Rates have been on hold since then.

The BOJ meeting is expected to end between noon and 2 p.m. local time. Financial markets are awaiting a news conference by BOJ Governor Toshiro Fukui expected from 3:30 p.m. for further clues on the timing of future rate hikes.

The GDP deflator, used to adjust the growth figure for price changes, fell 0.2% from the same quarter a year earlier, compared with a 0.5% fall in October-December, suggesting Japan is slowly emerging from deflation.

"Given the political consequences, the government may well announce that deflation has ended ahead of the (July) upper house election, possibly in June," Mizuho's Iizuka said.

In the January-March quarter, personal consumption, which accounts for some 55% of economic activity, rose 0.9% from the previous quarter, topping a market forecast for a 0.8 percent rise.

Exports also underpinned steady growth in the quarter, rising 3.3% from the previous quarter.

But capital spending, which has been the main engine of the economy's recovery, fell 0.9% after a 2.3% rise the previous quarter, hurt by weakness in the telecommunications equipment and automobile sectors.

In fiscal 2006/07 that ended in March, the world's second-largest economy grew 1.9%, matching the government's forecast for the year.