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Economy in Brief

Japan's Growth Gains Footing on Rise in Domestic Demand
by Carol Stone May 19, 2006

Japan's GDP surprised on the upside for Q1, in data reported today by the Japanese Cabinet Office. It expanded at a 1.9% annual rate. While this was less than Q4's 4.3%, it well exceeded forecasters' views that anticipated about 1.2%. The yen gained briefly on the report.

Notably, the driving force in the growth was private domestic demand, led by business investment. This component had fallen in Q4 and rebounded sharply in Q1, at a 5.8% annual rate. That put it 4.6% ahead of a year ago. Household consumption moderated from Q4, increasing at a 1.6% annual pace relative to 2.6% in Q4. Together, private domestic demand grew 3.2% on the quarter (annualized) and was also up 3.2% from a year ago.

Also of significance, growth of exports slowed from Q4's large 16.2% to "just" 11.3%. At the same time, imports switched from a modest decline in Q4 to a 12.6% rate of increase. Exports are substantially larger than imports, so these adverse moves did not keep the net export surplus from increasing, although the rise was very modest: only ¥308 million on a base of ¥18.1 billion.

Markets were encouraged that the domestic economy appears to be picking up steam. The price deflator is still falling, however, although this may be due in the most recent period by the surge in imported energy costs. The deflator for domestic demand is holding just about even with year-earlier levels. With these price signals still mixed, Bank of Japan officials remain skittish about whether the economy could stand higher borrowing costs; when they issued a statement to this effect later today, FX traders pushed the yen back down once again.

Chain GDP % Chg,
 Annual Rates*
Q1 2006 Q4 2005 Q3 2005 Year/ Year 2005 2004 2003
GDP 1.9 4.3 0.6 3.1 2.6 2.3 1.8
Household Consumption 1.6 2.6 1.8 1.2 1.7 0.6 1.0
Government Consumption 0.6 0.4 2.0 0.8 1.7 2.0 2.3
Private Plant & Equipment 5.8 -0.9 5.2 4.6 7.7 4.9 5.9
Exports 11.3 16.2 12.9 13.7 7.0 13.9 9.0
Imports 12.6 -2.5 13.3 8.0 6.3 8.5 3.0
Private Domestic Demand 3.2 3.0 -0.0 3.2 3.2 2.2 1.9
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