The world’s third largest economy has posted encouraging growth for Q1 2014. The figure for Japan’s GDP comes in at an annualised value of 5.9% and represents the best economic performance the nation has seen since 2011.
In April, the outset of Q2, a 3% increase in sales tax came into force in Japan; the first such increase in 17 years. It was anticipated that the tax hike would provide an impulse for domestic demand as consumers made purchases before the higher rate came into force. Domestic consumption accounts for about 60% of the nation’s output. Consumer spending enjoyed a 2.1% increase over Q4 2013, representing the best performance since Q1 1997. Car sales enjoyed a seven month rally to the end of March, but fell back last month. Refrigerators and computers also saw a boost before the increased sales tax came in.
Capital expenditure was also boosted to the best level seen since 2011, rising by 4.9% - the best performance since an 8.2% rise in the aftermath of the 2011 natural disaster.
The big question is whether or not the economy will continue to expand now that the tax increase is in place. In some quarters, Japan’s economy is predicted to contract by 3.3% in the current quarter before rebounding to growth of 2% in Q3. The Bank of Japan (BOJ) is targeting inflation of 2% this year, ending years of deflation. The BOJ will absorb the growth data in order to determine what steps need to be taken when setting monetary policy. The strong Q1 performance eases the likelihood that the BOJ will need to ease monetary policy in the immediate future.