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Japan Economy Grows at 5.3% Pace; Deflation Deepens (Update10)

Japan Economy Grows at 5.3% Pace; Deflation Deepens

May 17 (Bloomberg) -- Japan's economy grew twice as fast as economists forecast in the first quarter as consumer spending rose. The government said deflation deepened, sending stocks and the yen lower.

Growth in the world's second-largest economy accelerated to an annual 5.3 percent pace from a revised 0.1 percent rate in the fourth quarter, a report by the Cabinet Office in Tokyo showed today. The median forecast of 28 economists surveyed by Bloomberg was for 2.4 percent growth in gross domestic product.

Consumer spending accounted for more than half of the expansion as wages rose, helping sustain a recovery and boosting sales at retailers including Aeon Co. A measure of prices in the GDP report showed a decline of 1.2 percent, suggesting a seven- year bout of deflation that has sapped the economy is worsening.

``Growth seems to be heading in the right direction,'' said Takahira Ogawa, Tokyo-based director of sovereign ratings at Standard & Poor's. Still, ``it's going to take some time until we climb out of deflation.''

Stocks reversed gains and the yen fell as the report showed the GDP deflator, used to calculate growth adjusted for inflation, fell by more than the 0.4 percent drop in the fourth quarter and the 0.7 percent decline predicted by economists.

The Nikkei 225 Stock average fell 1.1 percent to 10,825.39 at the 3 p.m. close in Tokyo after rising as much as 1.1 percent. The yen weakened to 107.13 to the dollar at 11:10 a.m. in London from 106.74 late yesterday in New York. Government 10-year bonds rose, pushing the yield down half a basis point to 1.30 percent. A basis point is 0.01 percentage point.

`Looking Better'

Finance Minister Sadakazu Tanigaki today repeated calls for the central bank to maintain its policy of holding interest rates at zero while pumping cash into the financial system as ``moderate'' deflation lingers. The government is seeking to sustain growth to end price declines and reduce the world's biggest national debt.

``Despite the fact the economy is looking better, the Bank of Japan is not going to get rid of zero interest rates any time soon,'' said John Richards, head of rates strategy in Tokyo at Barclays Capital Japan Ltd.

Japan outpaced the 3.1 percent expansion in the U.S. in the first quarter. The 12 nations sharing the euro grew 0.5 percent from the previous quarter. China, Japan's second-largest export destination, is trying to cool its economy after growth of 9.5 percent last quarter.

``Growth, until now, has been too weak,'' said Naoki Murakami, senior economist at Goldman Sachs (Japan) Ltd., whose forecast for a 4.1 percent pace of first-quarter growth was the highest in the Bloomberg survey. ``It's highly possible that the economy can reach growth of 2 percent'' in the fiscal year started April 1, compared with 1.9 percent last year.

Hiring Gains

Quarter-on-quarter, the economy grew 1.3 percent in the three months to March 31, compared with economists' expectations of a 0.6 percent gain. From a year earlier, growth was 1.2 percent in real terms, today's report showed.

Consumer spending rose 1.2 percent from the previous three months, the first gain in a year, more than the 1.1 percent increase forecast by economists.

Japanese companies are hiring more workers and paying them better after reducing excess capacity and cutting debt in the course of four recessions since the nation's asset-price bubble burst in 1991.

Aeon, Japan's largest retailer, said on April 6 that net income rose 12 percent to 62.1 billion yen ($577 million) in the year ended Feb. 28 and sales rose 18 percent to 4.2 trillion yen. It expects sales to increase 3.4 percent this year.

Executives at retailers including Matsuzakaya say they are hopeful about the outlook.

Bonuses Rise

``I'm not pessimistic about consumer spending at all,'' Kunihiko Okada, president of Matsuzakaya, a Nagoya-based department store chain, said in an interview on May 13.

Twice-yearly bonuses, which usually amount to several months' salary, rose for the first time in eight years in December to 430,278 yen ($4,026).

The number of full-time workers in Japan rose in January for the first time since 1997, and the unemployment rate fell to 4.5 percent in March, matching a five-year low.

Household spending rose a seasonally adjusted 2.2 percent in the three months to March 31, the biggest gain in eight years, the government said on May 10.

Companies including Sharp Corp. are planning to spend more on factories and equipment as they prepare for a rebound in overseas demand for electronics after companies built up excess stockpiles last year.

Capital spending rose 2 percent from the previous quarter, today's report showed, and accounted for more than a fifth of the economy's expansion. Economists expected capital spending to rise 0.6 percent.

Exports

Machinery orders, which point to spending in three to six months, unexpectedly rose 1.9 percent in March, the government said on May 13, suggesting that gains in corporate investment will continue.

Osaka-based Sharp, the world's biggest maker of liquid- crystal display televisions, said on April 26 it will raise spending 3.3 percent to 220 billion yen.

Sumitomo Metal Industries Ltd., Japan's third-largest steelmaker, said this month it will spend 100 billion yen to boost annual capacity at its Wakayama mill.

``Manufacturers are replacing old furnaces and that means we can expect capital spending to increase into next year and the following year,'' Nobusato Suzuki, chief financial officer at Osaka-based Sumitomo Metal, said in an interview on May 10.

Overseas sales fell 0.2 percent, the first quarterly decline in more than three years, and imports rose 0.5 percent. Net exports, or the difference between exports and imports, subtracted 0.1 percentage point from growth.

Nominal GDP, which isn't adjusted for price changes, rose at an annual 2.3 percent pace, today's report said. Quarter-on- quarter, it expanded 0.6 percent, more than the 0.2 percent growth predicted by economists.


To contact the reporter on this story:
Lily Nonomiya in Tokyo at [e-mail]


LINK: http://www.bloomberg.com/apps/news?pid=10000080&refer=asia&sid=aMJnEyAIVSJE