Japan GDP Up, Wholesale Inflation Hits 27-Year High

Japan's growth has been revised up to 1 percent for the first quarter but this may be the last hurrah for the world's No.2 economy as surging raw material prices and a global economic slowdown bite.

Adding to the pressure on companies from spikes in materials costs, wholesale inflation hit a 27-year high -- reinforcing expectations of a rate rise by the Bank of Japan later this year.

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Economists said the data confirmed that strong exports, especially to booming emerging economies, led growth in the quarter, but they remained wary about the outlook.

"As a slowdown in real economy will become more evident toward the final quarter of this year, the Bank of Japan will have no choice but to hold off from raising interest rates in the current fiscal year to March next year," said Tatsushi Shikano, senior economist at Mitsubishi UFJ Securities.

The revision in gross domestic product lifted growth from a preliminary estimate of 0.8 percent and topped the median market forecast for a 0.9 percent rise, with capex figures revised up.

The BOJ faces a balancing act between a slowing economy and soaring energy costs, but is expected to sit tight for a while with its interest rates already low at 0.5 percent.

While some economists, such as Shikano, say they expect no BOJ move until next year, investors are increasingly focusing on warnings over inflation by other central banks and whether the BOJ may join the chorus of such concerns.

Derivatives contracts are pricing in about a 85 percent chance of a Japanese rate hike by the end of this year, up from less than half earlier this week.

No policy move is expected at the BOJ's next rate-setting meeting on Thursday and Friday, after the central bank gave up in April a two-year bias towards monetary tightening.

Capex Actually Rose

The upward revision in the first quarter growth was due to capital spending, revised to a 0.2 percent rise from an initial reading of a 0.9 percent drop.

"The capex was revised up to a plus figure but we still need to be a bit cautious about its outlook," said Takumi Tsunoda, senior economist, Shinkin Central Bank Research. "The economy is clearly facing downside risks. But I do not expect a deep slowdown either because overall, companies are still feeling that they have shortage of capacity."

On an annualized basis, GDP growth rate was revised up to 4.0 percent from 3.3 percent in the preliminary reading.

That was much higher than 0.9 percent growth in the United States in the same quarter as well as Japan's potential annual growth rate, which the BOJ sees at around 1.5 percent.

Rising oil and food prices have taken their toll on consumer sentiment and data on Wednesday showed the extent this is hitting companies too.

Japan's wholesale prices rose 4.7 percent in May from a year earlier, far above the median market forecast for a 4.1 percent rise and also sprinting ahead of consumer inflation, seen topping 1 percent in upcoming May data.