Japan's Economy Cools; BOJ Leaves Rates Unchanged

May 17 (Bloomberg) -- Japan's economy, the world's second largest, cooled in the first quarter as companies cut spending on concern that exports to the U.S. will slow. The central bank kept interest rates unchanged at 0.5 percent.
Gross domestic product grew at an annual 2.4 percent rate in the three months ended March 31, the Cabinet Office said in Tokyo today. The fourth-quarter figure was revised to 5 percent from 5.5 percent.
Consumer spending, accounting for more than half of GDP, rose more than expected and may cushion the economy from waning growth in the U.S., the nation's largest export market. Bonds headed for their biggest gain since March on speculation slower growth and two months of falling consumer prices will delay an interest rate increase.
``We've not seen such a balanced expansion for a long time,'' said Richard Jerram, chief Japan economist at Macquarie Research in Tokyo. ``With consumer prices still falling there's no particular hurry for the BOJ to be raising rates. I'd guess they'll stay on hold for three, maybe six months.''
The yield on Japan's benchmark 10-year bond fell 4.5 basis points to 1.62 percent at 3:38 p.m. in Tokyo. The yen fell to 120.94 per dollar from 120.69 before the GDP report. The median forecast of 37 economists surveyed by Bloomberg News was for 2.7 percent annual growth.
Consumer prices excluding fresh food fell 0.3 percent in March from a year earlier and 0.1 percent in February.
Consumer Prices
``When core prices will show stable increases is a crucial factor to gauge the next rate-hike timing,'' said Teizo Taya, a former central bank board member who is now an adviser to the Daiwa Institute of Research.
Of 17 Tokyo-based economists surveyed by Bloomberg News, eight said the central bank will probably raise rates in the third quarter and five said it will act in the last three months of 2007. The remaining four said the bank will wait until 2008.
In non-annualized terms, Japan's economy expanded 0.6 percent from the previous quarter, compared with 0.3 percent growth in the U.S. and 0.6 percent in the euro region.
``Japan's economy is solid overall and we'll watch risks in the global economy,'' Economic and Fiscal Policy Minister Hiroko Ota said today. ``Consumer spending is recovering, although we need to monitor it because wages haven't shown signs of picking up.''
Business Spending
Capital investment unexpectedly fell 0.9 percent, compared with an estimate for a 0.5 percent increase. It rose 2.3 percent in the fourth quarter.
``The drop in capital spending does reflect concern about the outlook for the U.S. economy, but it's also a correction from several quarters of very strong spending figures,'' said Takuji Aida, chief Japan economist at Barclays Capital in Tokyo.
Capital investment may rebound because companies may have deferred purchases of equipment until after April 1, when new rules on depreciation were implemented, according to Takehiro Sato, chief Japan economist at Morgan Stanley.
Exports rose 3.3 percent, more than the 2.8 percent expected by economists and accelerating from 0.8 percent expansion in the fourth quarter.
``Exports to Asia and Europe have offset a U.S. slowdown,'' said Hiromichi Shirakawa, chief economist at Credit Suisse in Tokyo. ``Exports to the U.S. are likely to pick up and then you'll have the U.S., Asia and Europe all going at once.''
Exports to Asia
Japan's shipments overseas rose to a record in March, the finance ministry said last month. Exports to China surged 15 percent and those to Europe advanced 14 percent. Shipments to the U.S. rose 2.4 percent. China's economy grew 11.1 percent in the first quarter from the year earlier.
Sony Corp., the world's second-largest maker of electronics, yesterday said sales this fiscal year will rise 5.8 percent, helping its profit to double to a record.
Net exports -- or the difference between exports and imports -- added 0.4 percentage point to GDP, up from 0.1 percentage point in the fourth quarter.
Consumer spending climbed 0.9 percent, adding to the 1.1 percent gain in the fourth quarter, the fastest increase in three years.
``Consumer spending has been strong for two consecutive quarters in the absence of wage increases,'' said Aida. ``Domestic demand is starting to gain enough traction to overtake exports as a driver of growth.''
The economy expanded 2 percent in real terms from a year earlier and 1.8 percent on a nominal basis, today's report showed. Real growth takes inflation into account.
In nominal terms the economy grew 0.3 percent from the previous quarter, compared with economists' expectations of a 0.5 percent gain. On an annualized basis, nominal growth, which doesn't take into account price changes, was 1.2 percent.
The GDP deflator, a broad measure of price changes, fell 0.2 percent from the same period a year earlier, compared with expectations of a 0.4 percent drop. The deflator hasn't risen since 1998.