Japan's GDP grew at a 5.9% annualized rate in Q1, beating expectations for growth of 4.2% and bringing hope that Japan will be able to avoid a tax-increase-induced slowdown in Q2 and beyond (1st chart). Indeed, the main drivers of the QoQ growth were private consumption and private non-residential fixed investment, which is a nice change from government-spending-led growth for the last year (2nd chart). However, we would caution about being overly optimistic on Japan's growth prospects for the next few quarters. For one, the increase in private consumption and investment is likely largely driven by demand being brought forward ahead of the April consumption tax increase. This tailwind will turn to a headwind in the Q2 GDP numbers. Secondly, the retreat in government investment (the grey bar below), is set to continue to detract from GDP in the coming quarters as stimulus spending winds down. We've noted all this in the past
here and
here.
Further, recent data don't yet reveal the foundations for the accelerating growth story. Real wages are falling and look set to continue on that course as the weaker yen feeds through to the real economy (3rd chart), consumer confidence has been falling since the middle of 2013 (chart 4), and business survey data (like the headline manufacturing PMI and the new orders components of the manufacturing PMI in charts 5 and 6) weakened handily in April.
