Japan growth data revised upwards

A surge in consumption and business investment has boosted Japan's economy

Japan has revised up its growth figures for the January-to-March period, due to stronger growth in business investment.

The Cabinet Office said the economy grew 1.6% during the period, up from its initial estimate of 1.5%.

That translates into an annualised growth rate of 6.7% - up from the initial figure of 5.9%. Many analysts had expected a downward revision.

Japanese consumers and businesses increased their spending during the period ahead of April's sales tax rise.

According to the revised figures, business investment rose 7.6% during the period, from the previous quarter, revised up from a preliminary 4.9% increase.

Meanwhile, consumer spending climbed 2.2%, up from the initial estimate of a 2.1% gain.

Growth slowdown?

Japan raised the sales tax, also known as consumption tax, from 5% to 8% on 1 April - the first increase in 17 years.

The increase was announced last year and consumers and business increased their spending in the months leading to its implementation, boosting Japan's growth.

Private consumption accounts for about 60% of Japan's economy.

But analysts have warned that spending may taper off in the current quarter, in part due to the tax rise and the spending surge before the hike.

"Looking ahead, output will surely shrink this quarter as consumers rein in spending after the consumption tax hike," Marcel Thieliant, Japan economist at Capital Economics, said.

Data released last month showed that retail sales in Japan fell 4.4% in April, compared with the same period last year, as the effect of the tax increase began to be felt.

However, Mr Thieliant added that business confidence had been improving in the country "which suggests that any weakness should prove short-lived".

Tax impact

The tax increase is widely seen as an attempt by the government to rein in public debt, while facing rising social welfare costs linked to an ageing population.

Japan's public debt, which stands at around 230% of its gross domestic product (GDP), is the highest in the industrialised world.

At the same time, many analysts have said the increase may also help Japan succeed in its battle against falling consumer prices.

Unlike many other leading economies, Japan has been battling deflation or falling prices for the best part of the past two decades.

That has hurt domestic consumption as consumers and businesses tend to put off purchases in the hope of getting a cheaper deal later on.

Policymakers have said that ending this cycle is key to reviving the Japanese economy and they have taken various steps to try and trigger growth in consumer prices., including setting a target of 2% inflation rate.

The measures seem to be succeeding as consumer prices in the country have now risen for 11 months in a row.

The impact of the sales tax increase was evident after data released last month showed that consumer prices in Japan rose at their fastest pace in 23 years, in April, jumping 3.2% from a year earlier.

-------------------------------------

"Output will surely shrink this quarter as consumers rein in spending after the consumption tax hike”

Marcel ThieliantCapital Economics