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Economy Registers Robust First Quarter Growth

July 30, 1999

Most economists were startled when the Economic Planning Agency announced on June 10, 1999, that Japan's gross domestic product for the first quarter of 1999 showed a seasonally adjusted growth of 1.9% over the previous quarter, or 7.9% in annual terms.

The unusually strong performance in the first three months of 1999 came after five straight quarters of decline, and even EPA Director General Taichi Sakaiya was driven to remark in his native Osaka dialect, "You've gotta be kidding."

The biggest factors behind the remarkable growth were higher capital spending and personal consumption. Outlays in new plant and equipment had been expected to remain sluggish in the light of the Japanese economy's large deflationary gap--the gap between actual spending and the value of demand existing plant and equipment are capable of meeting. But the first quarter figure showed a 2.5% rise, contributing 0.4 points to overall GDP growth.

Personal consumption similarly rose 1.2% (contributing 0.7 points) at a time when record-high unemployment was discouraging people from loosening their purse strings. Public works spending continued to pull the economy forward, moreover, jumping 10.3% over the previous quarter and contributing 0.9 points.

Psychological Shot in the Arm
The surprisingly robust figures have slightly altered the perception of the Japanese economy both domestically and abroad. Unlike in past years, little criticism was leveled at the performance of the Japanese economy at the recent Group of Eight summit in Cologne; instead expectations were expressed that the recovery would be given a firmer footing. Domestic investors have turned bullish, moreover, pushing up share prices.

The real question is whether the first-quarter figures represent genuine signs of a full-fledged recovery. Most economists believe that plant and equipment expenditures will take some time to regain full momentum, given the large deflationary gap. They also attribute the jump in consumer spending to a quirk in the seasonal adjustment calculations and doubt that consumers have really returned to their spendthrift ways.

In order for the Japanese economy to embark on the path toward a steady recovery, the government must continue to use all available means at its disposal to bolster economic activity, implementing expansionary monetary and fiscal policies and carrying through with industrial restructuring. A single quarter of growth does not mean that the economy is out of the woods just yet.

Trends in JapanEdited by Japan Echo Inc. based on domestic Japanese news sources. Articles presented here are offered for reference purposes and do not necessarily represent the policy or views of the Japanese Government.