Japan’s economic growth unexpectedly accelerated in January-March, driven by net contributions from exports and defying forecasts for a contraction in the world’s third-largest economy.

However, the surprise expansion was mostly caused by imports declining faster than exports, likely reflecting weak domestic demand, a point of concern for policymakers with a planned sales tax hike scheduled to take effect in October.

Underscoring this challenge were private consumption and capital expenditure readings, which both fell in the first quarter, while exports suffered the biggest fall since 2015.

Cabinet Office’s preliminary data showed Japan’s gross domestic product (GDP) grew at an annualised 2.1 per cent in the first quarter, versus the median estimate of a 0.2 per cent contraction in a Reuters poll of economists. It followed a revised 1.6 per cent expansion in April-June.

On a quarter-on-quarter basis, GDP grew 0.5 per cent, versus the median estimate of a flat reading. The GDP data comes as government’s coincident economic indicator flagged the possibility Japan may be in a recession as exports and factory output were hit by China’s slowdown and the Sino-US trade war, which has disrupted global supply chains.

Weak domestic demand is likely to complicate the challenge for Japanese policymakers who are counting on firm domestic demand to offset external headwinds.

There are growing calls from some former policymakers to delay the sales tax hike in the face of worsening domestic and external conditions.

Clouding the outlook on the economy, business and consumer spending weakened in the first quarter, while exports also took a hit.

Capital expenditure, which has been a bright spot, fell 0.3 per cent quarter-on-quarter in January-March, the Cabinet Office data showed. It compared with a 1.7 per cent decline expected by economists in a Reuters poll, after a revised 2.5 per cent growth the previous quarter.

Private consumption, which accounts for about 60 per cent of the economy, fell 0.1 per cent in the first quarter, matching a 0.1 per cent drop seen by economists and following a revised 0.2% gain in the final three months of 2018.

External demand - or exports minus imports - added 0.4 percentage point to growth, the data showed, after it subtracted a 0.3 percentage point from GDP growth in the previous quarter.

Weak domestic demand caused imports to decline 4.6 per cent on the quarter - faster than a 2.4 drop in exports - which helped net exports to improve in the first quarter.

Japan’s economic growth unexpectedly accelerated in January- March, driven by net contributions from exports and defying forecasts for a contraction in the world’s third-largest economy. However, the surprise expansion was mostly caused by imports declining faster than exports, likely reflecting weak domestic demand, a point of concern for policymakers with a planned sales tax hike scheduled to take effect in October.

Underscoring this challenge were private consumption and capital expenditure readings, which both fell in the first quarter, while exports suffered the biggest fall since 2015.

Japan’s economy grew at an annualised 2.1 per cent in the first quarter, gross domestic product (GDP) data showed on Monday, beating market expectations for a 0.2 per cent contraction. It followed a revised 1.6 per cent expansion in October-December.

The soft patches behind the headline GDP number could keep alive speculation that Prime Minister Shinzo Abe may postpone a twice-delayed increase in the sales tax in October.

“All of the most important components of GDP are negative,” said Hiroaki Muto, chief economist at Tokai Tokyo Research Center.

“The economy has already peaked out, so we are likely to have a mild recession,” he said. “No one would object to delaying the sales tax hike.”

The headline GDP expansion was caused largely by a 4.6 per cent slump in imports, the biggest drop in a decade and more than a 2.4 per cent fall in exports.

As imports fell more than exports, net exports - or shipments minus imports - added 0.4 percentage point to the gross domestic product (GDP) growth, the data showed.

Private consumption slid 0.1 per cent and capital expenditure dropped 0.3 per cent, casting doubt on policymakers’ view that solid domestic demand will offset the pain from slowing exports.

There have been growing calls from some former policymakers to delay the sales tax hike in the face of worsening domestic and external conditions.

However, Economy Minister Toshimitsu Motegi put a brave face on Monday, saying that there was no change to the government’s plan to raise the sales tax to 10 per cent from 8 per cent in October.

Reuters