Japan's economy grows at fastest pace in a year on boost from inventory

Wed May 20, 2015 1:24am EDT
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By Leika Kihara and Tetsushi Kajimoto

TOKYO (Reuters) - Japan's economy expanded at its fastest pace in a year in January-March as business investment rose slightly, but goods piling up in factory warehouses posed a potential challenge to policy makers seeking to vanquish years of deflation.

Private consumption, housing investment and exports all rose but at a feeble pace, leaving Tokyo with more work to do two years after a radical monetary stimulus program has brought only scant success.

"The growth number may look good on surface but there's not much to cheer about," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

The world's third-largest economy expanded at an annualized rate of 2.4 percent in the first three months of this year, beating a median market forecast for a 1.5 percent increase and a revised 1.1 percent expansion in October-December, data from the Cabinet Office showed on Wednesday.

The second straight quarter of expansion in gross domestic product (GDP) exceeded an annualized 0.2 percent gain in the United States and 1.6 percent growth in the euro zone, a sign Japan is steadily emerging from last year's recession.

But inventory was the biggest contributor to growth, adding 0.5 percentage point versus only 0.4 point gained by increases in domestic demand components like capital expenditure, consumption and housing investment.

"When excluding the contribution from inventory, the economy grew a meager 0.7 percent on an annualized basis," said Takeshi Minami, chief economist at Norinchukin Research Institute, cautioning against reading too much into the positive GDP figure.

Indeed, Dai-Ichi Life's Shinke said there's a risk inventory could shave off growth in the second quarter and keep any economic expansion modest.   Continued...

Cranes tower above a construction site in the Toyosu district in Tokyo, February 12, 2015.  REUTERS/Thomas Peter