Japan's 0.9% rise in GDP beats forecast

Consumption was stronger than market's prediction.

According to UBS Investment Research, first quarter GDP was better than expected and lifts its 2013 forecast to 1.6%. The economy grew 0.9%q/q (consensus 0.7%).

UBS noted that most of the analysts felt that consumption would accelerate in 1Q based on improving consumer sentiment, but consumption was quite a bit stronger than they thought.

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This is clearly sentiment driven given contracting wages and no capex in 1Q13. Nonetheless, the current momentum in sentiment should deliver decent consumption over the next quarter or two assuming policy momentum is sustained, and of course in 4Q13 consumption should accelerate ahead of the expected consumption tax hike in April 2014.

Exports also did well, but this is less about the yen and more about the state of external demand. Note that Korean exports on a GDP basis grew 3.2%q/q versus Japan’s 3.8%q/q.

Part of the story here is about service exports and especially merchanting services in both economies. On a separate note, 10yr JGB yields have risen sharply over the past week or so.

This most likely reflects improving momentum in the economy as well as some sympathy with US treasury yields which have also increased, in our opinion. In light of today’s better-than-expected GDP we don’t view rising JGB yields with alarm at these levels and note that the BoJ is already taking steps to restrain yields from here.