May 15, 2014 2:00 pm JST

Consumer, capital spending gives Japan's economy big lift in 1Q

TOKYO -- Japan's economic growth in the first quarter of the year was strong, thanks to private-sector demand driven by rising consumer spending, capital investment.

     The spike in domestic demand in January to March does not appear to be entirely due to a last-minute surge before the consumption tax was raised to 8% from 5% on April 1. The increase was much greater than in the first quarter of 1997, just before the previous tax hike.

     Real capital spending jumped 4.9% from the previous quarter and the growth was 1.0 percentage point higher than in the same period of 1997. The rise in capital expenditure, meanwhile, was the largest in nine quarters.

     Consumer spending also leaped. The rise in the latest three-month period was the same as that in the same period of 1997, but it should be noted that the service industry's contribution was weak due to heavy snowfall in February.

     In addition to the run-up before the tax increase, there are other tentative factors to pump up the numbers for January to March. Typical factor was the replacement demand for PC. U.S. software giant Microsoft announced it was ending support in April for its popular Windows XP operating system, leading many to upgrade.

     Consumer spending on durable goods rocketed 13.7% from the previous quater, significantly larger than 4.5% increase for the same period in 1997, largely due to surging demand for cars, air conditioners, refrigerators and other pricey items before the tax hike.

     Although housing starts declined during the period, transactions continued to grow because houses whose construction contacts were finalized by the end of last September were taxed at the lower rate of 5%, even though delivery will take place after April 1.

    Labor shortages at homebuilders also pushed spending on houses into the January-March quarter from earlier periods, due to construction delays.

     The durability of the recovery remains in doubt, however, as the effects of these one-off factors lessen over time. Much will depend on whether the government's revised growth strategy, to be released in June, keeps businesses and consumers optimistic about their prospects.