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Japanese economy grows at 5.9 per cent rate on rush to buy ahead of sales tax hike

TOKYO - Japan's economy grew at a 5.9 per cent annualized rate in the first quarter, the fastest in nearly three years, as companies and consumers brought forward spending to beat a sales tax increase that is expected to cause a contraction in the current quarter.

The growth figures for the world's third-largest economy released Thursday were in line with expectations. Strong private consumption, residential investment and corporate spending were the biggest contributors to growth, while public spending fell slightly.

Since taking office in late 2012, Prime Minister Shinzo Abe has sought to get Japan's growth back on track through a combination of heavy government spending, ultra-loose monetary policy and economic reforms.

Although the economy was already recovering when Abe took office, his "Abenomics" formula is credited with boosting corporate profits and helping Japan escape from a longtime deflationary rut. Sustaining growth will require major reforms to boost competitiveness and unlock bottlenecks inhibiting growth, economists say.

Abe is due to present in June his latest explanation of reform plans, which so far have made little headway. Haruhiko Kuroda, who as governor of the Bank of Japan is the most influential ally of the "Abenomics" strategy, describes the reforms as the "final and most important element in addressing Japan's challenges."

Labour policy reforms, such as increased participation of women in the workforce and better use of foreign labour, are needed to help improve Japan's lagging productivity and improve public finances, Kuroda told a conference Thursday.

"This will be a golden opportunity to resolve the medium- to long-term challenges facing Japan's economy," Kuroda said.

Kuroda reiterated his belief that the economy is moving toward sustained growth, with price increases moving toward the official target for 2 per cent inflation.

Wages have not kept pace with inflation, even with minor increases for the fraction of workers who are represented by unions during spring labour negotiations. But Kuroda said he believes tightening employment conditions will lead to the improved incomes needed to support growth in the long run, he said.

Japan's quarter-to-quarter growth in January-March, adjusted for inflation, was 1.5 per cent, the fastest rate since the rebound from the March 2011 earthquake and tsunami. It was the sixth straight quarter of expansion.

The increase in the sales tax to 8 per cent from 5 per cent on April 1 is expected to cause a contraction in GDP in the current quarter. But the latest data suggest growth may be buoyant enough to rebound relatively quickly.

The recovery in the U.S. and Europe may help Japan increase exports, so far an area that has lagged expectations as soaring import costs for energy, food and industrial components have outpaced increases in demand for Japanese products overseas.

However, corporate spending has also been slow to pick up, as companies with fattened balance sheets have opted to expand operations and acquisitions offshore rather than beefing up their factories in Japan, where growth is expected to remain slow due to the aging and shrinking of the population.

"The evidence shows Abenomics has given a big boost to the economy so far, but it's mainly stimulus driven. The challenge is to shift to private sector demand," said Romain Duval, Asia-Pacific division chief at the International Monetary Fund.

The Canadian Press

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