Will domestic demands in Japan compensate for weak exports?

Growth will most likely come in the range of 2-3%, according to analysts.

As Japan announces their 1Q12 GDP on 17 May 2012, the effect of weak exports is already anticipated. Will government subsidies on fuel-efficient car purchases and domestic spending on reconstruction drive growth?

Here's more from DBS Group Research:

The first quarter GDP will be announced 17 May 2012. Consensus is looking for a strong growth of 3.5% QoQ saar, up from -0.7% in 4Q11. Whereas exports have remained weak in 1Q, domestic demand has picked up to boost the overall growth, thanks to the increase in public and private spending on reconstruction, the release of pent up consumer demand, as well as the government’s subsidies on the purchases of fuel-efficient cars.

Judging from the weaker-than-expected export data and industrial production, however, the risk to the consensus forecast of 1Q GDP would still be tilted towards the downside. Growth is more likely in the range of 2-3%.

Ahead, GDP growth is expected to ease to 1-2% from 2Q onwards. There is no change in the view that reconstruction will gather pace from 2Q, as the government’s third supplementary budget has been implemented since April. However, there are currently growing concerns over the export outlook, due to faltering demand from Europe and a persistently strong yen caused by global risk aversion.

Japanese manufacturers’ latest production forecast for April-May appears pessimistic. Meanwhile, the current strong rise in consumption growth aided by government stimulus on car sales is not sustainable. Local auto makers expect car sales growth to lose steam before autumn, as the subsidy budget will be used up.

In addition, given that the operation of all the nuclear reactors has been suspended from this month, energy shortage will become a bigger supply side challenge this summer. The market and the authorities have upgraded Japan’s GDP growth forecast over the past few months. A further upgrade is unlikely, and the risks have shifted to the downside.

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