Japan’s economy avoids recession in Q1, BoJ still likely to further ease policy

The Japanese economy grew surprisingly at an annualized rate of 1.7% in Q1 2016, as compared with consensus expectations of 0.3% growth. It countered the revised contraction of 1.7% recorded in the last quarter of 2015. However, on a year-on-year basis, Japan’s real GDP growth was flat in the first quarter.

The above-expected figure for Q1 GDP was mainly due to a recovery in consumer spending; however, the leap year provided an additional day of production and spending to the performance of Japan’s economy. Private consumption contributes 60% to the GDP. It grew at an annual rate of 1.9% in the first quarter, partially countering the contraction of 3.3% recorded in the fourth quarter of 2015.

Meanwhile, export also helped with the overall growth of Japan’s GDP. Exports data grew at an annualized rate of 2.4% in Q1, whereas fixed business investments dropped 5%. This was the first decline in three quarters. It indicates that corporate profitability and sentiment are being weighed on by a sharp appreciation of the Japanese yen.

However, the first quarter economic growth report does not alter the projection of additional easing by the Bank of Japan, said Nordea Bank in a research report.

“We continue to expect the central bank to cut the rate on excess reserves by 20bp to -0.30% on 16 June”, added Nordea Bank.

Furthermore, the economic growth figures are unlikely to reduce speculations regarding additional fiscal stimulus such as further delay of the sales-tax hike intended for 2017, noted Nordea Bank.