In first-quarter 2019, Japan’s economy as a whole grew 0.5% on the prior quarter. This rise, and most certainly its sheer scale, took market pundits completely by surprise: Because on the back of what were very poor sentiment figures of late for both Japanese corporates and private households, and not least against the backdrop of the Sino-US trade dispute, which also impacts negatively on Japan’s exports, the consensus had been that the growth rate would at best hover around the zero line. What in the final instance triggered the quite pronounced growth were imports, which dropped by minus 4.6% (Q/Q) and therefore fell faster than did exports (minus 2.4%).
In other words, the current figures can by no means be read as proof of a strong economy, but rather for weakening domestic demand. This can also be seen from the fact that both investments and private consumer spending fell in the first three months of the year, namely by minus 0.3% and minus 0.1% respectively. Even government spending, at minus 0.2%, made a negative contribution to economic output. However, it bears considering that precisely the Japanese growth figures have in the past proven to be very prone to a subsequent need for revision, meaning that we cannot exclude a later downward correction for the most recent data set becoming necessary.
For Prime Minister Abe, who as in recent months has repeatedly emphasised that he intends to uphold his plans to raise VAT, the recent hike in growth comes at an opportune moment. Abe will of course also know that the figures by no means point to a robust economy. We assume that the government will press ahead with its expansionary fiscal measures and potentially new investments, too, and will most certainly actually raise the VAT rates by 1 October of this year.