Japan Economy Grows Less Than Forecast, Putting Pressure on BOJ

May 20 (Bloomberg) -- Japan’s economy grew less than forecast in the first quarter as an export-led recovery failed to stoke consumer spending, putting pressure on the central bank to do more to end deflation as it begins a two-day meeting.

Gross domestic product rose 4.9 percent in the three months to March at an annualized rate, up from 4.2 percent in October to December, the Cabinet Office said in Tokyo today. Unadjusted for price changes, so-called nominal GDP gained 1.2 percent on a quarterly basis, the most in a decade, as trade rebounded.

Stocks fell and Finance Minister Naoto Kan said he expects the Bank of Japan to support an economy that’s not yet in a self-sustained recovery. The comeback in world trade, spurred by China’s demand, is helping countries across Asia, with Singapore today reporting GDP jumped an annualized 38.6 percent and Taiwan forecast to say its expansion accelerated in the first quarter.

“As long as demand from emerging economies remains strong, Japan’s economy will stay on a recovery track,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. The direction of overseas economies poses “a major risk factor,” he said after Europe’s debt crisis has deepened concern about the durability of global growth.

Japan’s benchmark Nikkei 225 Stock Average dropped 0.7 percent to 10,113.50 at the lunch break in Tokyo, bringing its slide in the past month to 7.2 percent. Against the euro, the yen strengthened to 113.14. Its 11 percent climb versus the European currency in the past month threatens to make its exports to the region more costly.

Nissan, Tokyo Electron

In the first quarter, companies from Nissan Motor Co. to Tokyo Electron Ltd. reaped the benefits of the trade recovery as they forecast higher profits and spending. The rebound also did start feeding into wages and the labor market. Earnings rose for the first time in 22 months in March and the ratio of job openings to applicants advanced for a third month.

Consumer spending rose 0.3 percent in the first quarter, slowing from the previous period’s 0.7 percent gain, today’s report showed.

“The data raises concern about the outlook for consumption” as fiscal stimulus efforts wear off, said Muto at Sumitomo Mitsui. “The improvement in wages is still lagging behind and failing to take over the role of locomotive.”

Business spending gained 1 percent, less than the fourth quarter’s 1.3 percent. Housing investment climbed 0.3 percent, the first increase in five quarters.

The 4.9 percent annualized growth rate followed a revised 4.2 percent expansion in the previous quarter, today’s report showed. The median forecast of 21 economists surveyed by Bloomberg News was for a 5.5 percent gain in GDP last quarter.

Bring Inflation Back

Tokyo Electron said last week that it would return to profit this fiscal year and more than double capital spending to 35 billion yen. Nissan, Japan’s third-largest automaker, forecast profit will more than triple this fiscal year as auto demand recovers in North America and sales grow in China.

“The best thing Japan can do is to bring inflation back to their economy,” Huw McKay, a senior international economist at Westpac Banking Corp. in Sydney, said in a Bloomberg Television interview. Sustained nominal GDP growth will help stoke inflation expectations and start to narrow the nation’s fiscal deficit, he also said.

Aeon Co., Japan’s second-biggest retailer, said in April that it would cut prices of as many as 500 products. The Chiba- based company forecasts profit will rise as much as 22 percent this fiscal year as cost reductions offset weak consumer outlays.

Price Declines Moderate

Price declines in Japan did moderate last quarter, with the domestic demand deflator falling 1.9 percent, the smallest drop in a year, today’s report showed. From the previous three months, it rose for the first time in seven quarters.

“This suggests Japan is passing through the worst phase of deflation, although it will take time until the nation fully overcomes it,” said Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo. “Deflationary pressure is easing gradually.”

Faster growth would provide some relief for Prime Minister Yukio Hatoyama, whose public support has tumbled ahead of an upper-house election to be held in July.

Kan’s remarks in a press briefing in Tokyo today indicated the government will maintain pressure on the Bank of Japan to take more action. The central bank, which starts a two-day policy meeting today, will probably keep the benchmark interest rate at 0.1 percent, all 16 analysts said in a separate survey.

Kan, who is also deputy prime minister, said that he expects the Bank of Japan to support the economy with “flexible and appropriate” policy and that officials must be “cautious” about calling the recovery self-sustaining.

“The BOJ’s unlikely to change their policies as a result of the GDP report,” Kyohei Morita, chief economist at Barclays Capital in Tokyo, said before the report. “As long as deflation continues, the government’s going to continue demanding more from the BOJ to beat deflation.”

Governor Masaaki Shirakawa’s board pledged to help lenders provide credit at its previous meeting in April. The bank may announce an outline of the lending plan at this week’s meeting, according to six of 16 economists surveyed by Bloomberg.