Japan’s unexpected growth spurt comes with reasons for caution

Bloomberg

Japan’s unexpected growth spurt in the first quarter masked weakness in the economy just as policy makers prepare to hike the sales tax in October.
Gross domestic product expanded an annualised 2.1 percent, but the biggest driver was imports falling even faster than exports, which meant that net exports technically fueled growth in the economy. Declining imports is a sign of weakness in demand, so the GDP figure is somewhat misleading.
The economy’s pillars of ­­­growth — exports, capital spending and private consumption — all declined during the quarter, with exports tumbling 2.4 percent, the most since 2015. Picking up some of the slack were public spending and rising inventories, neither of which are signs of a strong economy.
Supporters of the tax hike are likely to point to the GDP figure to argue that the hike should go ahead, amid growing concern in Prime Minister Shinzo Abe’s
ruling party that it could
derail the economy at a time of weakness. Economy Minister Toshimitsu Motegi said there is no change in the government’s plan to raise the tax.
Another reason for caution is that the GDP figure is subject to large revisions. A 2015 study found that Japan’s revisions to year-on-year growth figures were the second-largest among 18 OECD economies. When Abe decided in late 2014 to postpone the sales tax hike the first time, a preliminary GDP figure had shown the economy shrinking 1.6 percent the previous quarter. The figure was later revised to growth of 0.3 percent.
“The discussion about the
tax hike delay might settle down,” said Hiroyasu Ando, senior economist at Sumitomo Mitsui Banking.