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Banzai bonanza continues for Japanese equities

Stronger than expected economic growth in the three months to March has helped explain the sweeping surge in the Tokyo Stock Exchange in 2023.

Data issued Thursday showed the second estimate of March quarter growth was much stronger than anyone had forecast – an annualised 2.7% against market forecasts of 1.9% and the first estimates 1.6% figure a month ago.

The Nikkei Index, a narrow-based measure of Japanese market activity has climbed more than 22% this year and more than 9% in the past month as it has risen to a high of just over 32,700 points – the highest for more than three decades.

The Tokyo market fell yesterday in the wake of the GDP numbers, with the Nikkei losing 0.85%.

Private non-residential investment, or capital spending, rose 1.4% — higher than initial government estimates of 0.9%. Private demand rose by 1.2% and domestic demand rose by 1%, while exports of goods and services dropped 4.2%. Imports also fell 2.3%, the revised government data showed.

But business investment was estimated rising at a higher rate than in the first figures – 1.4% against 0.9%. Data last week showed business spending running at the highest level since 2015.

Domestic demand as a whole contributed 1.0 percentage point to the revised first-quarter GDP growth, more than initially estimated. That’s very different to Australia where it was business and government investment, with a small add-on from households, that produced the weak 0.3% rise in GDP in the quarter.

What was more interesting about the latest data and the March quarter performance was that it was off the back of higher domestic activity while exports, the usual driver of Japanese growth, fell more than 4%.

“Despite the global economic slowdown, the Japanese economy remains resilient – ample private consumption will continue to support the growth,” said Takumi Tsunoda, senior economist at Shinkin Central Bank Research Institute.

But he cautioned that much of the growth in the revised figure came from higher business inventories.

Companies’ work-in-progress inventories, particularly among automakers and semiconductor equipment firms, and capital expenditure rose faster than previously reported, contributing to the upward revision.

Quarter-on-quarter, the economy grew by 0.7%, beating market estimates of 0.5% and easily ahead of the 0.4% first estimate.

That growth left the Australian economy in the dust – our growth was 0.3% quarter on quarter for an annual rate of 2.3% in the three months to March.

The figures also revised out a technical recession reported for the second half of last year, defined as two consecutive quarters of contraction. The revised data showed GDP rose 0.4% in October-December, following the 1.5% contraction in July-September.

Japan has a March financial year and the stronger end to the period in the quarter saw annual growth jump to 1.4%, from 1.1% in the original estimate and 2.1% in 2021-22.

Japanese manufacturing activity returned to expansion in the June start of month survey after six months of contraction.

Higher wages (up 3.9%) and high inflation (3.4% annual) have helped lift the economy out of the doldrums and from the edge of another bout of deflation, helped by the loosest monetary policy stance of any major central bank for most of the past 11 years.

The Bank of Japan’s next two-day monetary policy meeting is due next week and the stronger data is seen as a way for the central bank to start tightening its very lose monetary policy, though no one is expecting a move until Prime Minister Kishida has decided on whether he will hold an early election later this year.

A cautionary note is the impact of strong growth in inventories. The rise in work in progress and stocks (at tech companies and car makers, as well as it power companies and steel mills) could very well see growth slow this quarter as those products are consumed and not replaced because of expectations for lower and slower demand, especially exports.