Japan Economy Grew Faster than Expected in the First Quarter

May 20, 2015Japanby EW News Desk Team

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Japan's economy grew 0.6 percent in the first quarter, surpassing previous expectations of 0.4 percent growth. The Japanese economy grew 2.4 percent annually from January to March, which outgrew U.S. annual growth of 0.2 percent.

Japan has a long way to go in terms of recovery, but the overall outlook of the economy remains stable. Although consumer spending and exports continue to be a problem, Japan owes its success to such factors as lower oil prices, rising spending among tourists, a pick-up in capital spending and a rebound in the housing market. Japanese firms reported strong profit numbers, thanks to a weaker currency, and many companies awarded the benefits to shareholders through dividends and buybacks. With that being said, the prosperity is not being spread among Japan's workforce, which continues to be a primary reason why consumer confidence wanes. A recent sales tax increase, the first in 17 years, has slowed consumer spending and kept the economy from growing further. Prime Minister Shinzo Abe has another sales increase in the works, but his administration postponed that hike until 2017. The increase means to address the nation's gigantic debt, but Japanese politicians risk raising consumption taxes at their own peril, especially since so much of the economy thrives on consumer spending.

Corporate inventories may have accelerated, but current consumer participation levels will not be enough to instill greater growth for the year. Abe's plan, also known as 'Abenomics,' aims to combat a deflation-ridden economy that has hurt consumer spending, damaged production goals and hampered job creation. Abe hopes to maintain a consistent level of inflation to create economic growth, and he has achieved his goal to a degree. Inflation increased in March, for the first time in 10 months, but only at 0.2 percent.

Critics contend that not enough structural reform measures are in place, such as wage and investment growth. Japanese firms are not investing domestically, with overall investment falling 5.5 percent, due to an aging population and decreasing demand. Further, Japan is dealing with a shrinking population as well, causing many investors to turn to other markets such as India, a nation that holds a younger and stronger workforce. Although real income increased 0.6 percent in Japan, lackluster real wage growth remains an issue. Abe believes that growth hinges on companies passing on profits to workers, but the prime minister has yet to convince companies to do so, despite higher profit margins. Export-based firms are beginning to boost wages, but only time will tell if Japan will foster wage increases across the board.