TOKYO (MNI) – Japan’s economy posted the fourth straight quarter of
growth in the January-March period, backed by strong exports to Asia,
continued consumer spending gains and a recovery in business investment,
but for the whole of fiscal 2009 marked the second largest drop on
record in inflation adjusted terms.

Preliminary Q1 data released on Thursday showed that the 1.2% q/q
gain in real GDP, an annualized rate of +4.9%, was supported almost
equally by domestic demand (+0.6 percentage point) and overseas demand
(+0.7 point).

It was the first time since July-September 2004 that all the
components in domestic demand grew, including a slight gain in housing
investment.

Q4 GDP was revised up slightly to +1.0%, or annualized +4.2 from
the +0.9% (annualized +3.8%) reported in March.

“The GDP data confirmed that the Japanese economy is picking up.
While labor conditions remain severe, higher corporate profits are
expected to support a continued improvement in the economy,” Deputy
Prime Minister Naoto Kan told a news conference.

At the same time, he repeated the government’s recent warning that
a sustained economic recovery could be hit by a possible slowdown in
overseas economies.

“We need to be cautious about determining whether all factors in
the latest GDP growth are self-sustaining,” said Kan, who is also the
ministers of finance as well as economic and fiscal policy.

The Q1 growth was led by the positive contribution of +0.7
percentage point q/q in net exports of goods and services (exports minus
imports), up from +0.6 point in Q4, 2009.

The growth was also supported by wide areas of consumer and
business spending, by +0.2 percentage point each by private consumption
and private-sector inventories as well as by a 0.1-point increase in
capital investment.

Based on customs-cleared data released by the Ministry of Finance,
exports to Asia rose 12.3% in January-March from the previous quarter in
seasonally adjusted terms and those to European Union gained 5.6%, while
shipments to the U.S. fell 1.4%.

Japanese exports in the quarter were led by demand for industrial
machinery for metal works and mining as well as ships and automobiles.

“The effects of recalls by Toyota could not be confirmed in the GDP
data. While exports to the U.S. were down in the MOF trade data, auto
exports overall were up 3.1%,” Keisuke Tsumura, parliamentary secretary
of the Cabinet Office for economic and fiscal policy, told reporters.

In real GDP terms, exports rose 6.9% q/q in January-March, up for
the fourth straight quarter and accelerating from +5.8% in
October-December 2009 but decelerating from +8.6% in July-September and
+10.1% in April-June.

Imports were up 2.3% in Q1 on higher prices of crude oil and
natural gas, trimming GDP growth by 0.3 percentage point.

The 0.3% q/q rise in consumer spending, up for the fourth quarter
in a row but slower than +0.7% in Q4, was propelled by continued high
levels of durable goods spending on flat-screen TVs and other
electronics.

Consumers continued to spend more on durable goods, taking
advantage of subsidies and tax breaks for buying low-emission vehicles
and the government-sponsored reward program for purchases of greener
consumer electronics.

In March the program was expanded to include purchases of
energy-saving homes and renovation of existing houses. This should
support consumer spending and housing investment in the coming quarters.

Also notable was the second straight quarter-on-quarter rise in
business equipment investment, largely in industrial and precision
machinery (bulldozers, camera lenses). It grew 1.0% q/q in Q1 after
+1.3% in Q4, which was the first q/q gain in seven quarters.

Private-sector housing investment rose 0.3% q/q, posting the first
rise in five quarters after -2.7% in the previous quarter, but it made
no contribution to the Q1 GDP growth.

Government consumption rose 0.5% q/q, up for the sixth straight
quarter on higher medical costs (+0.1 percentage point contribution to
GDP), while public investment fell 1.7%, down for the third quarter in a
row as the effects of the current administration’s review of “wasteful”
spending lingered (-0.1 point contribution).

The GDP deflator in the first quarter rose 0.01% in January-March,
showing the first q/q rise in five quarters. The domestic demand
deflator rose 0.4% in Q1, up from -0.7% in Q4.

Tsumura explained that it did not reflect an improvement in Japan’s
negative output gap (overcapacity vs. slack demand), but was propped up
by higher vegetable prices.

From a year earlier, the GDP deflator posted a record 3.0% drop
after -2.7% in the final quarter of 2009. This was because the import
deflator (mostly energy costs) rose 8.9%, more sharply than the
1.6% rise in the export deflator.

The domestic demand deflator fell 1.9% y/y, decelerating from a
revised -2.6% in Q4.

Kan noted that the downward pressure on prices remains overall in
Japan, saying “mild deflation” continues.

The government and the Bank of Japan will keep in close touch and
continue to take necessary policy actions in each field in order to
overcome deflation, he said.

In nominal terms, the economy grew 1.2% q/q, marking the second
straight quarterly gain after +0.3% in Q4.

As downward pressure on prices eased slightly, nominal GDP
surpassed real GDP for the first time in five quarters but the
difference was narrow, +1.214% in nominal growth vs. +1.209% in real
growth.

From a year earlier, Q1 real GDP grew 4.6% after -1.1% in Q4,
posting the first year-on-year rise in eight quarters since +1.2% in Q1,
2008.

From fiscal 2008 to 2009, the negative carryover totaled 4.5
percentage points in real terms and 4.1 points in nominal terms, which
caused GDP to slump by a real 1.9% and a nominal 3.7% in the last fiscal
year that ended in March, both the second-largest drops on record since
the government began compiling GDP data in 1955.

The largest fiscal year GDP contractions were marked in fiscal 2008
(real -3.7%, nominal -4.2%).

Conversely, GDP figures for this fiscal year will be pushed up by
the positive carryover of 1.5 percentage points in real terms and 1.0
point in nominal terms.

Revisions made to past figures showed that the largest real-term
economic contraction on record remained a revised -4.2% q/q (annualized
-15.9%) marked in January-March 2009, followed by an unrevised -3.4%
(annualized -13.1%) posted in January-March 1974 in the wake of the
first oil crisis.

Real gross domestic income (GDI), which takes “trading
gains/losses” into account, rose by a seasonally adjusted 0.7% q/q in
January-March 2010, up for the second straight quarter after +1.0% in
October-December 2009, as Japan’s terms of trade improved on recovering
global demand for Japanese goods.

msato@marketnews.com
** Market News International Tokyo Newsroom: 81-3-5403-4837 **

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