Japan's economy grew at a faster pace than expected in the first three months of the year as rising business investment and consumer spending helped to broaden an export-led recovery. But analysts said high oil prices and the prospect of interest rate rises in the United States and China loomed as risks in the months ahead. Gross domestic product (GDP) grew a real 1.4 percent in the quarter, beating a median forecast of 0.9 percent growth in a poll. It was the eighth straight quarterly expansion, the longest stretch since nine consecutive quarters in 1995-1997. "Consumer spending and private capital investment were the upward surprises," said Peter Morgan, chief economist at HSBC Securities.
"This data would suggest that the economy is still looking pretty strong overall, even if it is still primarily being driven by export growth," Morgan said. On an annualised basis, GDP expanded 5.6 percent, beating a forecast of 3.6 percent and outstripping U.S. growth of 4.2 percent in the same period. Robust exports of high-tech goods such as flat panel TVs and DVDs, especially from China, has spurred investment and lifted corporate profits, which are slowly feeding through into rising incomes and more jobs. Japan's imports have also grown, indicating that domestic economic activity is picking up. Domestic demand's contribution to January-March GDP remained firm at 1.1 percent after 1.3 percent in October-December.
DOMESTIC DEMAND RISING
Business investment gained for the seventh straight quarter, increasing by 2.4 percent over the previous three months, much better than a forecast of 1.6 percent. New investment has been helped by record profits at many Japanese car, electronics and other firms in the year to March. Matsushita Electric Industrial <6752.T>, maker of Panasonic products, is expected to announce later on Tuesday that it and a partner will invest some $790 million to build a plasma display panel factory that media have said would be the world's biggest. Conditions are also improving for the consumer. Unemployment dropped to 4.7 percent in March, the lowest level in three years. Tuesday's data showed that private consumption, the largest part of the economy, grew at a better-than-expected 1.0 percent. Falling prices, a problem for the economy for over four years, are also moderating, though there is no sign of rises yet.
Nominal GDP, which does not take into account price changes, expanded 0.8 percent in the three months to March, the fastest pace since the October-December quarter of 1996. But the GDP deflator was minus 2.6 percent, the 24th consecutive negative figure. It was minus 2.4 percent for the year to March, the biggest negative figure since 1981. For the fiscal year ended March, the economy grew at its fastest pace in seven years at 3.2 percent, beating the government's forecast of 2.0 percent. October-December GDP was revised up to 1.7 percent growth on the quarter from a previous 1.6 percent. Tokyo share prices rose on the figures, with the Nikkei average <.N225> up around 1.6 percent in afternoon trade. The dollar fell more than half a yen to a session low of 113.83 yen after the data before settling back at around 114.10 yen.
RISKS AHEAD
Analysts cautioned that higher oil prices and the prospect of interest rate increases in the United States and China loom as potential risks for future growth. "We expect growth to slow down in the next quarter as various negative factors surface, such as record high oil prices, falling stock prices and possible interest rate rises in the U.S. and China," said Kenji Arata, an economist at Informa Global Markets. The recent fall of the yen to eight-month lows against the dollar has raised concerns that Japan, entirely dependent on imported oil, will be especially hurt by higher energy prices. Benchmark U.S. light crude reached $41.85 a barrel on Monday, the highest price since the New York Mercantile Exchange launched the crude contract in 1983. Brighter U.S. economic data have also fanned speculation the Federal Reserve will raise interest rates as soon as next month. That could slow demand for Japan's goods in its largest single export market. There are also concerns that Chinese authorities may attempt to dampen their economy by tightening credit, crimping demand for Japanese products. Some also raised doubts about the sustainability of the pickup in domestic demand, although a downturn was not expected. "Growth will be led by domestic demand, but there are worrisome factors. Consumers are spending beyond their incomes, and we may see a pullback from recent gains in capital spending," said Taro Saito, senior economist at NLI Research Institute. The government maintained an upbeat view. "Considering the current situation, I think we will be able to have a rather bright outlook," Chief Cabinet Secretary Hiroyuki Hosoda told a news conference, referring to the current fiscal year, for which the government forecasts growth of 1.8 percent. Japan's economy can contract by 0.1 percent for each quarter in fiscal 2004/05 to meet the government forecast.///