Japan's growth in first quarter fails to tame deflation

Latest data show Japanese economy still lurking in deflation, despite much better than expected, 1.7% annualized growth in first quarter. Many had predicted Japan’s economy to contract in the first.

Bank of Japan’s preferred measure, which excludes volatile components like food and energy rose just about 0.7% in April and headline inflation was much worse. Prices declined -0.3% y/y in April, despite it being the month, when companies actually raise prices to begin the fiscal year with.

Another measure shows, situation unlikely to get better going ahead. As per early estimate released along the national CPI, Tokyo consumer prices declined -0.5% in May. But when food and energy is excluded CPI rose 0.5%.

Bank of Japan (BOJ) is already purchasing assets (government bonds, ETFs) at ¥80 trillion per month and has introduced negative interest rates on excess deposit. Further easing would be difficult to achieve as government bond market is becoming extremely saturated with BOJ holdings. BOJ policy new needs fiscal support.

Prime Minister Shinzo Abe is now expected to announce fiscal stimulus package after the G-7meeting and to delay sales tax hike. Abe previously said that he would not delay sales tax hike unless Lehman like crisis hits financial markets and economy or there is natural catastrophe like 2011 tsunami.

During the G-7 he described current economic conditions, similar or worse than 2008/09 crisis fuelling speculation that he may go for a delay in tax hike.