Japan economy gathers pace in first quarter as recovery takes hold

Japan's economy grew at a faster-than-expected 2.4 per cent annual pace in the January-March quarter, suggesting a recovery is gaining traction despite persisting weakness in corporate and household spending.

About two percentage points of the first quarter's growth reflected an increase in inventories stemming from the plunge in demand that followed a sales tax increase in April 2014. An increase of 7.5 per cent in housing investment also drove growth.

Overall trends for the economy are positive, said Masamichi Adachi, an economist with JPMorgan in Tokyo. Lower costs for oil and gas imports, thanks to the plunge in crude oil prices, is one big plus, he said.

"We see a huge income shift from the oil exporters to the importers like Japan," he said. A windfall for corporate profits from the yen's depreciation against other currencies is also helping.

"People's confidence is getting a little better," he said.

But there is still little sign of the kind of increase in consumer and business spending needed for a sustainable recovery, he said.

The data reduce the likelihood the Bank of Japan will opt to expand its lavish monetary stimulus at a policy meeting later this week.

The 0.6 per cent rise in GDP from the previous quarter was the second straight quarter of growth. Economists had mostly forecast growth for the first quarter at about 1.5 per cent.

Economists are divided over whether the recovery is finally on track after years of tepid growth.

The increase in private-sector inventories in the last quarter suggests persistent weakness in domestic demand. Exports also were a net drag on growth.

Public investment plunged 5.5 per cent, though real incomes rose 0.6 per cent, helping to underpin demand.

More than two years after Prime Minister Shinzo Abe launched his recovery platform heavy on monetary stimulus, two per cent inflation remains elusive; wage increases have been scant and corporations have held back on investing at home, wary of slow growth in a shrinking domestic market as the population ages and shrinks.

Abe and other leaders say sustained growth depends on companies passing on more of their rising profits to consumers in the form of bigger wage hikes.

- AP