- Japan's GDP in Q1 13 expanded 3.5% q/q AR so the country appears to have embarked upon a relatively strong recovery. The major impact from Abenomics has yet to work its way through the economy, so the outlook for the coming quarters, where we expect GDP growth to continue to exceed 3% q/q AR, remains strong. We revise our GDP forecast for 2013 higher to 2.0% from previously 1.6%.
- The big question is whether the strong recovery in the coming quarters will be an argument for Bank of Japan to scale down the aggressive expansion of its monetary base soon. In our view not. Fiscal policy will be tightened aggressively next year when GDP growth is poised to slow markedly and the output gap will not close enough to reach Bank of Japan's 2% inflation target. Hence the case for continuing the current aggressive easing remains next year and relative monetary policy should continue to favour a weaker JPY next year.
The Japanese economy appears to have started a relatively strong recovery in Q1 13 where GDP expanded 3.5% q/q AR (Cons: 2.7%, DB: 2.6%) after increasing 1.0% q/q AR in Q4 12 (revised up from 0.2% q/q AR).
The recovery in Q1 was driven by both domestic demand and exports. Private consumption in Q1 increased 3.7% q/q AR, while residential investments increased 7.9% q/q AR. On the other hand, private business investments contracted 2.6% q/q AR. The development in domestic demand was broadly in line with our expectations. Exports surged 16.1% q/q AR and net exports added 0.4% to GDP in Q1. This was much stronger than expected and suggested by foreign trade data. Inventory cuts subtracted 0.2% from GDP in Q1, which was also more than expected.
Assessment And Outlook
Today’s GDP data were strong and suggest that Japan has started a relatively strong recovery. On the surface it suggests that Prime Minister Shinzo Abe’s attempt at kick-starting the economy so far has been successful. However, the full force of Abenomics (fiscal easing and aggressive monetary easing) has not really been felt in Q1 and is expected to start to have a real impact in Q2. The impact from the weaker JPY usually works with a considerable lag and can hardly explain the strong export performance. Instead some temporary factors have aided the recovery in Q1. The consumer boycott of Japanese branded products and the abolishment of subsidies for purchase of eco-friendly autos in September last year weighed on exports and private consumption late last year. The negative impact from these two factors has started to wane. In addition, reconstruction after the earthquake and tsunami in March 2011 continues to add to growth.
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