Japan's economy grew faster than expected in January-March, expanding at its quickest pace in a year on the back of solid private consumption and a rise in exports spurred by Prime Minister Shinzo Abe's aggressive monetary and fiscal stimulus.
Thursday's Cabinet office data showed, however, that corporate investment has yet to follow to ensure a sustained economic upturn.
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Gross domestic product (GDP) rose 0.9 percent from the previous quarter, against the median forecast of 0.7 percent expansion in a Reuters poll of analysts. The growth translated into an annualized 3.5 percent, compared with 2.5 percent for the United States in the same quarter.
The data -- which covers the first full quarter since Abe's return to power in late December -- is viewed as the first comprehensive report card on his plan to revive the world's third-largest economy. Solid readings will help Abe keep high support until the upper house poll in July.
The first quarter gain mainly reflects the psychological effects of improved expectations behind rising domestic demand. Analysts expect the pickup in domestic demand and export income that Abe is hoping to jolt the economy out of its two-decades of stagnation will materialize ahead.
"Personal consumption was really strong and exports did better than expected. Stock gains and expectations for higher salaries are driving consumption now," said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo.
Private consumption, which accounts for roughly 60 percent of the economy, rose 0.9 percent as expected and was up for a second consecutive quarter, reflecting the better consumer mood helped in part by a buoyant stock market.
Exports, helped by the yen's retreat to 4-1/2-year lows against the dollar, beat expectations, making a 0.4 percent net contribution to GDP, despite higher import costs caused by a weaker currency.
Capital spending disappointed, however, falling 0.7 percent in the quarter, defying expectations of a 0.7 percent increase, in a sign that despite improved business sentiment Japanese companies remain cautious and hesitant to boost investment.
Consumer spending could suffer from rising costs of energy and imported goods unless the summer round of bonuses boosts incomes enough to make up for a squeeze in disposable incomes.
Abe has yet to deliver pro-growth reforms promised as part of his three-pronged strategy. But extra stimulus spending and the Bank of Japan's plan to double its government debt holdings have lifted consumer and business mood, sending the yen sharply lower and boosting share prices by 70 percent since November when Abe first presented his economic plans.
Even though it is far from clear whether "Abenomics" will bring back sustained solid growth that has eluded Japan for the past two decades, analysts expect the economy to maintain momentum in the current quarter, helped by public investment, a weak yen and recovery in the U.S.
"The economy will enjoy strong growth for another year or so. It's no longer just about brightening sentiment and rises in equities prices. There's now proof that Abenomics is working and that the economy is on a solid footing," said Yoshiki Shinke, senior economist at Dai-Ichi Life Research Institute in Tokyo.
(Additional reporting by Chris Gallagher, Stanley White and Leika Kihara; Editing by Tomasz Janowski and Shri Navaratnam)