Japan GDP jumps as stimulus masks deflation crisis

The government, which has been pressing the Bank of Japan to broaden its policy response to deflation, drew little comfort from the 1.1 percent expansion in the world’s second-largest economy compared with the previous quarter. The median forecast in a poll of analysts was for growth of 0.9 percent.

Markets focused on the record three percent annual fall in the GDP deflator as a sign that the large gap between supply and demand was pushing Japan deeper into deflation. Japanese government bond futures hit a two-week high after the data.

Domestic demand was the economy’s brightest spot in October-December, adding 0.6 percentage point to GDP growth, the first positive contribution in seven quarters.

That momentum was likely to fade, economists said, citing the dwindling impact of stimulus announced by the previous government and uncertainty over how quickly the new administration plans would boost consumption.

The gloomy outlook leaves Japan’s policy-makers with the vexing question of how to achieve high growth when the huge public debt limits the government’s ability to pump-prime the economy and when the central bank has exhausted its conventional policy options.

“While such deflationary tendencies persist, the need for a policy response centred on the BOJ is increasing, not diminishing,” said Tetsufumi Yamakawa, chief economist at Goldman Sachs Japan.

BOJ policy
The BOJ reviews policy at a two-day meeting and most economists expect no change in monetary policy. The central bank pumped more cash into the banking system at an emergency meeting in December and has signalled it is ready to ease again if financial markets destabilise.

Government officials have been pushing the BOJ to do more to fight deflation, although they have avoided the fierce criticism that preceded the BOJ’s emergency meeting in December when one minister said the central bank had fallen “asleep at the wheel”.

Finance Minister Naoto Kan said that the government could not be optimistic about the economy even though the risk of another recession had receded.

“I think the government may look at the GDP figures as reasonably good news but will maintain its policy support and remain vocal on monetary policy,” said Adrian Foster, head of financial markets research at Rabobank International in Hong Kong.

One risk stems from a policy shift introduced by the Democratic Party-led government that was voted in last year.

The new government is shifting money away from the public works projects favoured by its predecessor and is supporting household spending instead, a policy that has a less direct impact in a country with a strong propensity to save, and which could briefly slow economic growth.

“Public works spending has fallen for two straight quarters and the outlook for private consumption is uncertain until the effect of government payouts to households with children begins to show,” said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.

Domestic demand was a key driver of growth last quarter. Private consumption gained 0.7 percent, compared with a 0.6 percent rise the previous quarter and a median forecast for a gain of 0.3 percent.

Corporate investment rose 1.0 percent, the first gain since Q1 of 2008, but less than a forecast for a 1.5 percent gain.

Copier and camera maker Canon Inc plans to boost its capital expenditures by two percent to 220 billion yen ($2.4bn) for 2010 after slashing spending by 40 percent in 2009.

“As the world economy recovers and central banks globally start tightening monetary policy, the BOJ may not move along with them, making the yen weaken naturally,” said Takuji Okubo, chief economist at Societe Generale Securities in Tokyo.

The fourth quarter growth was the fastest since a 1.3 percent expansion in April-June 2009 and translated into an annualised rise of 4.6 percent, beating a 3.7 percent forecast.

The US economy grew at an annualised clip of 5.7 percent in the same quarter, while the euro zone economy expanded 0.1 percent on the quarter.