Japan's economy likely to slow in Q2

The acceleration in GDP growth last quarter was mostly due to a jump in inventories, and a range of indicators point to a slowdown in the second quarter.

GDP expanded by 0.6% q/q (2.5% annualised) last quarter, faster than the 0.4% q/q rise in Q4 14. The result was above the consensus estimate of a 0.4% q/q increase.

However, the details were discouraging. To be sure, the 0.4% q/q rise in private consumption broadly matched the increase observed in the previous quarter, and was stronger than expected. But net exports shaved off 0.2 percentage points (pp) from headline GDP growth. What's more, a 0.5 pp boost from stockbuilding flattered the headline figure.

Looking ahead, a range of indicators point to a slowdown in the second quarter. Industrial production in March was 4% below its January peak, and the drop in the manufacturing PMI to a multi-month low in April suggests that conditions are unlikely to improve quickly.

According to Capital Economics, Japan's GDP growth will be close to zero this year, well below the consensus estimate of a 1% rise, before picking up to 1.5% in 2016 as consumer bring forward spending ahead of 2017 sales tax hike. However, today's data suggest that the chances of near-term easing by the Bank of Japan have diminished.