Japan pulls out of recession with consumer boom

Japan posted its best economic growth in two years in the first quarter, outpacing the US and the UK and emerging from its worst post-war recession.

Japan posted its best economic growth in two years in the first quarter, outpacing the US and the UK and emerging from its worst post-war recession.

But some of the gloss was taken off the figures, published yesterday, by forecasts that weak business investment looks set to restrain the rebound.

A burst of consumer spending and exports pushed Japan's GDP up 1.4 per cent over the three months to March from the previous quarter, government data showed.

The expansion, which was slightly above market forecasts and the first growth for four quarters, translated into annualised growth of 5.7 per cent – the fastest since the first quarter of 2000. This means Japan is outpacing American growth of 5.6 per cent for the same period.

"The economy hit a floor faster than many people had anticipated," said Taro Saito, senior economist at NLI Research Institute. "But I don't expect such strong growth in April to June. It will be much lower, probably closer to zero."

There will also be lingering doubts among analysts who remember that first-quarter economic growth in 1999 was eventually revised down from of a whopping 7.9 per cent to minus 3.9 per cent.

Ministers played down the report, highlighting risks that recent rises in the yen pose to car makers, electronics companies and other big manufacturers at the heart of a first-quarter export boost to US and Asian markets. The Japanese Prime Minister, Junichiro Koizumi, is putting finishing touches on tax reforms and other measures aimed at keeping the recovery going, and is expected to present the plan at a summit of G8 leaders in Canada later this month.

"We have to implement economic measures in the future without losing our resolve," Mr Koizumi said.

Later he said the government must find ways of raising revenue to finance any tax cuts, showing he was committed to fiscal prudence while recognising the need for stimulus steps. "Our basic tenet will be 'no tax cut without resources'," he said in a statement.

For the next year to March 2003, the government has forecast zero growth, but economist say even that could prove optimistic.

Many economists doubt consumer spending and exports can sustain their current strength. The rise in personal consumption could also be revised down due to a change in GDP calculations to take effect in the current quarter, they added. "The trend in export growth will taper off over the summer," said Fiachra Maccana head of equity research at WestLB Panmure in Tokyo. "Technology-related exports will have their quiet period through August."

Government spending was surprisingly strong in the quarter, rising 4.1 per cent. Unseasonably warm weather sparked a 1.6 per cent rise in consumer spending. Household spending rose again in April by a real 1.9 per cent from a year earlier, or 2.0 per cent from March.