TOKYO: Japan has posted its longest economic expansion in over a decade, government data showed Thursday (May 18), chalking up a win for Tokyo's growth bid even though the battle to conquer deflation is still far from won.
The world's number three economy grew 0.5 per cent in the first three months of 2017, its fifth straight winning quarter, up from a 0.3 per cent rise in the last quarter of 2016, the Cabinet Office said.
Japan's prospects have been improving on the back of strong exports, with investments linked to the Tokyo 2020 Olympics also giving growth a boost. The labour market is tight and business confidence is high.
But consumer spending remains tepid and efforts to lift inflation have largely fallen flat despite years of monetary easing by the central bank. Individual spending accounts for more than a half of Japan's GDP.
Private consumption picked up a modest 0.4 per cent in the first quarter from the preceding three months' zero growth.
The latest reading nonetheless means Japan's economy has had its best string of gains since 2006, during the tenure of popular former prime minister Junichiro Koizumi.
The figures are good news for the current prime minister Shinzo Abe -- whose brief and underwhelming first term as Japan's premier came directly after Koizumi.
A string of short-term leaders followed before Abe swept back to power in late 2012 on a pledge to reignite Japan's once-booming economy with a plan dubbed Abenomics.
The scheme -- a mix of huge monetary easing, government spending and reforms to the economy -- stoked a stock market rally and fattened corporate profits.
The Bank of Japan (BoJ), aiming to create two-percent inflation as a key part the growth bid, now expects to reach that goal by 2019 -- four years later than planned.
Still, the central bank and International Monetary Fund both recently lifted their projections for growth.
A weak yen has helped prop up the economy as it makes Japanese exports more competitive and inflates profits when overseas income is repatriated.
An improving global outlook with strong demand for Japanese smartphone parts, memory chips and construction machinery has also been a tailwind, analysts said.
"With growing external demand set to continue, we believe there will be the need for many companies to replace machinery and equipment," Katsunori Kitakura, lead strategist at asset manager Sumitomo Mitsui Trust Group.
"The crucial question is how far capital expenditure will be increased in the meantime," he said in a commentary released ahead of the GDP data.
Cash-rich firms have also been stingy with pay hikes, which hurts spending and acts like an anchor on the economy.
In March, some of Japan's top companies, including Toyota and Hitachi, announced their lowest wage hikes in years.
"Wages are still stagnating, despite sharp falls in unemployment," research house Capital Economics said in a commentary.
"This seems to be because aggressive monetary easing has failed to lift expectations of future price rises among households and firms.
"Unless this changes, the chances of inflation settling at two percent or higher are slim," it added.
Despite healthy profits, many Japanese firms remain cautious about the world economy, partly due to worries that US President Donald Trump's protectionist leanings could hurt exports.
Japan has been struggling to conquer years of deflation and slow growth that followed the bursting of an equity and property market bubble in the nineties.
Falling prices can discourage spending by consumers, who might postpone purchases until prices drop more or they might save money instead.
That puts pressure on businesses, creating a cycle in which firms then cut back on expanding production, hiring new workers or boosting wages.