Questions remain over Japan's recovery


Japan's economic outlook is brighter following the release of March quarter GDP figures

By Geoff Hiscock
CNN Asia Business Editor

TOKYO, Japan (CNN) -- Japan's economy grew faster than expected in the first quarter of this year, but analysts warn it could be just a one-off spike.

Figures released by the Cabinet Office Friday show gross domestic product grew 1.4 percent in the March quarter from the previous quarter.

That is an annualized rise of 5.7 percent, and follows three straight quarters of economic contraction.

The data, along with other figures Friday showing consumer spending rose 1.9 percent in April from a year earlier, gives a boost to hopes that the world's second-largest economy is recovering from its deepest postwar recession.

A recent pickup in exports of motor vehicles and consumer electronic products to the U.S. market is adding to this more optimistic view.

On the consumer front, the Ministry of Public Management, Home Affairs, Posts and Telecommunications said Friday that average household spending in April was 320,068 yen ($2,577).

One-off spike

Ministers in the government of Prime Minister Junichiro Koizumi have been saying for some weeks that the Japanese economy has reached the bottom and is on the point of recovery.

But some analysts suggest that the March quarter figure may be a one-off spike. They say the consumer spending figures are distorted and the sustainability of any recovery is in question (Full Story).

UBS Warburg chief economist in Tokyo, Hiromichi Shirokawa, told CNN after the GDP figures were released that business investment in Japan remained weak, and the strength of the U.S. recovery would be crucial to Japan's chances for sustained growth.

Shirokawa said the March quarter growth figures were built on government spending, rising exports and the need to restock inventories.

But he warned that capital spending by business was still "quite weak". He said the biggest risk for Japanese exports and corporate profits was a slower recovery in U.S. capital spending.

"If U.S. capex is weak, we'll have to downgrade exports and profits," he said.

Subject to revision

Friday's 1.4 percent quarter-on-quarter rise in real GDP was slightly better than expectations, but may yet change. Japan's GDP data is always subject to revision, with final figures for the March quarter due out in two months' time.

Government figures showed the economy shrank 1.3 percent in the financial year that ended in March -- weaker than the forecast 1.0 percent contraction.

The official forecast for the year that began April 1 is for zero growth. That compares with a calendar year forecast by regional analyst IMA Asia this week of 0.5 percent growth in 2002 and 1.2 percent in 2003.

Another major forecaster, the Pacific Economic Outlook released last week, sees a 0.4 contraction in Japan this year and 1.5 percent growth next year.

IFR Asia Pacific chief economist George Worthington said in a commentary on Monday that any gain in the March quarter would be eaten away in subsequent quarters.

'Not sustainable'

"We believe that this Q1 bounce is in no way sustainable," he wrote, noting there has been "virtually no progress on domestic economic reforms".

Despite its export-led uptick of recent months, Japan still faces a host of problems that include deflation, high unemployment, lacklustre consumer demand, a banking system burdened with bad loans, and a powerful group of politicians opposed to the structural reform proposals put forward by Koizumi.

The Koizumi administration is to unveil another economic stimulus package late Friday.

The other closely watched element of Japan's economic situation is the value of the yen, which has strengthened to around 124-125 as the U.S. dollar weakens.

The Bank of Japan has intervened several times in recent days to keep it at about that level.

A stronger yen hurts Japanese exporters, particularly those sending consumer electronics and cars to key markets like the U.S.

In Asian currency trade late Friday, the yen is quoted at 124.21 to the U.S. dollar.

On the stock market, the benchmark Nikkei 225 finished about 1.2 percent lower, following Wall Street's sharp decline Thursday. Tech stocks in particular were down.