Japan's economy grows faster than expected

Japan consumption will accelerate: CLSA
Japan consumption will accelerate: CLSA

Japan's economy staged an encouraging comeback in the first quarter, expanding at its fastest pace in a year, data showed on Wednesday.

Gross domestic product (GDP) expanded an annualized 2.4 percent compared with the previous quarter, beating the 1.5 percent print expected in a Reuters poll. In the October-December quarter, the economy expanded 1.5 percent on-quarter after contracting in both the second and third quarters of 2014.

On a quarter-on-quarter basis, GDP grew 0.6 percent in the first three months of this year, more than a 0.4 percent increase expected in a Reuters poll.

The news helped to spur the Nikkei Average to a near one-month high of 20,207. The yen strengthened initially, but fell back to two-month lows of 120.93 against the dollar on strong U.S. data.

Helping to drive the GDP advance was private consumption, long a sticking point in the country's attempts at an economic recovery, grew 0.4 percent from the previous quarter, compared with 0.2 percent forecast in a Reuters poll.

That may mark a reversal as Japanese households, hit by a tax hike, lower real wages and higher prices, had been cutting back on spending.

"Consumption ought to accelerate from here. Think about it: if you've got 2.3 percent growth in wages, you've got a very, very tight job market. So everyone knows, 'they can't fire me, they got no one to replace me with,'" Nicholas Smith, a Japan strategist at CLSA, told CNBC. "I've placed a lot of weight in my portfolio in retail and that's been vindicated so far this year. It looks as if the story is very much on track."

Kiyoshi Ota | Bloomberg | Getty Images

Capital expenditure also rose for the first time in four quarters, growing 0.4 percent on-quarter, compared with expectations for a 0.8 percent rise from a Reuters poll.

Economists have been watching Japan's economic data closely for signs Abenomics, or Japanese Prime Minister Shinzo Abe's plan to kick-start the long-moribund economy out of its decades-long struggle against deflation, has made any progress.

Some are unconvinced that the GDP data will herald a sustained recovery.

"The acceleration in GDP growth last quarter was mostly due to a jump in inventories, and a range of indicators point to a slowdown in the second quarter," Marcel Thieliant, a Japan economist at Capital Economics, said in a note Wednesday. He expects Japan's GDP growth will be around zero for the year, adding that the data suggest that the near-term chances of further easing from the Bank of Japan have diminished.

And not everyone is convinced domestic demand is making a comeback. In a note, DBS says private consumption on an annualized basis, while up 1.4 percent, grew at a similar rate as in the third and fourth quarters of 2014

"The cumulative growth in consumption in the past three quarters has remained far from enough to offset the contraction in early-2014 caused by the sales tax hike. This means that consumer spending remained far weaker than the normal levels prior to the tax hike," DBS said.

"Admittedly, the pace of consumption recovery has remained very slow so far and whether it could pick up and match expectations in the coming quarters will remain to be seen," the note added.