Japan's economy grew last qtr on healthy consumer spending, investments

Japan's economy grew at an annual rate of 3.1 per cent in the April-June period, rebounding from the contraction in the previous quarter, government data showed Thursday.

The world's fourth largest economy grew 0.8 per cent in the fiscal first quarter, according to the Cabinet Office.

Seasonally adjusted gross domestic product, or GDP, measures the value of a nation's products and services. The annual rate shows how much the economy would have grown or contracted, if the quarterly rate had continued for a year.

Domestic demand grew a robust 3.5 per cent from the previous quarter on the back of healthy household consumption and private sector investments, as well as government investments. Exports grew a booming 5.9 per cent.

Japan's GDP shrank 0.6 per cent in January-March on quarter, after eking out 0.1 per cent growth in October-December last year. Economic growth went back and forth between such periods of contraction and weak expansion for the past year.

Today's GDP data signal that the virtuous cycle between income and spending has become more pronounced but uncertainty surrounding macro policies has heightened, said Robert Carnell, regional head of research Asia-Pacific at ING Economics.

Carnell was pointing to the announcement Wednesday by Prime Minister Fumio Kishida that he won't seek reelection as head of the ruling Liberal Democratic Party. Whoever replaces him as the party leader in the September vote will become prime minister since the party controls parliament.

There is no strong contender to take over Kishida's role, making it difficult to estimate the policy direction of the next government, Carnell said.

The Liberal Democrats have governed Japan almost the entire postwar period and are credited with guiding the nation's rise as an economic power. But voters are increasingly worried about Japan's declining clout.

Japan is not facing the inflationary pressures seen in parts of the U.S. and other developed nations. Price rises have stood lately at about 3 per cent for Japan, which underwent years of deflation, or a continuous cascading down of prices that underlines a fragile economy.

The Bank of Japan, which kept interest rates at zero or below zero for years, has finally begun to raise rates. Some analysts say the move is part of the various factors behind the recent wild gyrations in global stock markets. The fluctuations have somewhat quieted in recent sessions.

We now think the Bank of Japan will take a more cautious approach to interest rate hikes due to the recent market turbulence following the last meeting, which saw a sharp unwinding of the carry trade, said a report from BMI, a unit of Fitch Solutions.