The sun rises on New Year's Day behind from Mt. Fuji in Japan's Yamanashi prefecture on January 1.

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Japan's economy rebounded in the first quarter to 4.1% annualized

Analysts warn expansion could ease as boosts to consumption and investment fade

Financial Times  — 

Japan’s economy rebounded in the first quarter, but analysts warned that the pace of expansion will soon ease as temporary boosts to consumption and investment fade.

Thursday’s data from the Cabinet Office showed that the world’s third-largest economy grew 1 per cent between January and March, slightly higher than forecast, compared to revised 0.1 per cent growth in the final three months of 2011.

While an annualised growth rate of 4.1 per cent is striking – more than three times better than forecast 2012 real average growth in the G10 economies – Japan is unlikely to keep it up, say analysts.

Much of the growth came from the reintroduction of government incentives to buy fuel-efficient cars, due to expire in August, and from the beginning of earthquake-related reconstruction activities in the Tohoku area. As those twin boosts fade, growth may tail off toward the end of the year.

“This is a short-term, cyclical lift,” said Masamichi Adachi, economist at JPMorgan in Tokyo, before the data were released.

Domestic demand accounted for 0.9 percentage points of the quarterly growth, led by household consumption excluding rent (up 1.2 per cent) and public investment (up 5.4 per cent).

Exports were relatively weak, rising 2.9 per cent from a 3.7 per cent fall in the fourth quarter, when flooding in Thailand hit shipments of cars and electronics.

“Whether the overseas economy recovers smoothly before the effects of eco-car subsidies and other policy measures weaken” will be the key factor determining the direction of the Japanese economy, according to a report this month by the Japan Centre for Economic Research, an independent think-tank. The JCER expects growth to moderate to 2.2 per cent in the second and third quarters and 1.7 per cent in the final three months of the year.

The impact of the total shutdown of nuclear power generation may also weigh on industrial production, as electricity supplies fall short of demand in the peak power-consuming months ahead. In the industrial heartland of Kansai, home to Panasonic, Sharp and Nintendo, consumers face the tightest limits on power use, the government says.

A deteriorating outlook for industry was indicated by the manufacturing purchasing managers’ index for April, published by Markit. The headline index dropped back to 50.7 from 51.1 in March, with new export orders particularly weak at just 48.5. The employment component was below 50, signalling contraction, for the second successive month.

Recent consumer price inflation data, too, suggests subdued demand. In Tokyo in April, prices excluding fresh food fell by 0.5 per cent, year-on-year, and by a full 1 per cent excluding food and energy.

The yen’s 4 per cent climb against the dollar since mid-March is adding to exporters’ concerns. The FX picture may encourage politicians to keep pushing the Bank of Japan to add more stimulus, perhaps as early as its policy board meeting next Wednesday.

“We wouldn’t completely rule out a renewed contraction,” wrote analysts at Capital Economics in London, before the growth data release.