Will doom follow Japan's first quarter boom?
While Japan clocked its fastest growth rate in over two years in the first quarter, economists warn it's too early to pop the champagne.
The world's third-largest economy grew at an annualized pace of 5.9 percent in the January-March quarter, well above 4.2 percent growth economists polled by Reuters expected, led by a surge in private consumption before the April 1 sales tax increase and stronger business investment.
However, the bumper gross domestic product (GDP) growth is likely to be followed by a second quarter slump as consumers rein in spending after the tax hike, experts said.
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"It's inevitable because the big gain in first quarter was driven by a rush in demand ahead of the consumption tax hike," said Junko Nishioka, chief Japan economist at RBS, projecting growth will contract by an annualized 3.8 percent in the April-June period.
Nevertheless, positive underlying economic momentum points to a rebound in the second-half, she noted.
"The recovery of capital expenditure is particularly encouraging - it shows that Abenomics is taking effect," she said, referring to Prime Minister Shinzo Abe's three-pronged plan to revive the economy.
Capital spending grew 4.9 percent, far exceeding expectations for a 2.1 percent rise and marking its biggest gain since October-December 2011.
In addition, the labor market recovery will support growth, she noted. The country's job market has picked up in the recent months as firms have become willing to hire more workers on the back of economic recovery.
Japan's jobless rate currently stands at 3.6 percent - significantly lower than advanced economy peers such as the U.S. and U.K. where the unemployment rate remains above 6 percent.
Forward-looking business surveys, including the April Economy Watchers Survey published earlier this week, also indicate growth will bounce back after the second quarter.
The survey of workers such as taxi drivers, hotel workers and restaurant staff - called "economy watchers" for their proximity to consumer and retail trends - showed their confidence about future economic conditions jumped by 15.6 points on month to 50.3. The 50-level separates optimism from pessimism.
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"While the first quarter's strong growth will likely give way to contraction in the second quarter, recent positive sentiment surveys suggest that Japanese growth should continue above the pre-Abenomics trend when the volatility caused by the tax increase passes," said Bill Adams, senior international economist for PNC Financial Services.
The stellar growth figure is raising questions over whether the Bank of Japan (BoJ) will stand pat on its monetary policy for a while longer.
The implementation of the tax hike had raised expectations for further monetary stimulus to counter any negative drag of fiscal tightening on the economy.
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"It is hard to believe that the BoJ will ease policy, judging from the perspective of economic growth and price increases, but the central bank may do so if financial markets are rattled for whatever reason or because of political pressure," Taro Saito, senior economist at NLI Research Institute told Reuters.
The central bank has kept monetary policy steady since delivering unprecedented stimulus in April last year, pledging to double base money via aggressive asset purchases.