Japan: Stronger than Expected GDP and Bought Foreign Bonds for Third Week

Japan reported a stronger than expected Q1 GDP expansion, confirming it was the fastest growing economy in the G7. Separately, the Ministry of Finance reported the third consecutive weekly net purchases of foreign bonds.

Japan reported that the world's third largest economy grew at an annualized rate of 3.5%, faster than the 2.7% expected and follows the recent upwardly revised (due to a technical error)1% pace in the final quarter of 2012. The quarterly pace was 0.9%, rather than the consensus forecast of 0.7% and 0.3% in Q4 12.

Consumer spending and exports were the main contributors to GDP. The former alone accounted for 2.3 percentage points of growth and the latter, 0.4 percentage points.  Business investment was the weakest since the tsunami and private non-residential investment took 0.3 percentage points from growth, while inventories took another 0.8 percentage points. 

While growth offered an upside surprise, the GDP deflator was a downside surprise. This measure of prices was 1.2% lower than a year ago, the most deflation since Q4 2011.  

Separately, the Ministry of Finance reported that Japanese investors bought foreign bond for third consecutive week.    Many observers have been waiting for institutional investors to diversify away from the JGB market, where the BOJ is set to buy 70% of the new issuance.  However, the sums involved remain quite small.  During this three-week buying spree, Japanese investors have bought just shy of JPY700 bln of foreign bonds.  In the prior three week period, they sold JPY2.3 trillion of foreign bonds.  

Moreover, our diagnosis of the yen's recycling problem (not the traditional trade surplus, but the investment income and foreign capital inflows) does not mean that Japanese investors do not buy foreign assets; simply that they do not buy enough.  Consider in the past three weeks, as Japan bought the equivalent of about $7 bln of foreign bonds, foreign investors bought a little more than $19 bln of Japanese stocks and bonds.  

Separately, the BOJ has pumped massive amounts of liquidity into the banking system and this is helping stabilize the JGB market after the worst sell-off in a decade.  The BOJ injected JPY2 trillion of 1-year money at 0.1% (LTRO?) on top of the normal operation that provided JPY800 bln.  

Japanese stocks initially rallied in Tokyo, with the Nikkei making new 5-year highs before reversing.  The high flying JASDAQ was hit much harder by the wave of profit-taking, led by consumer goods and health care.  

The dollar initially came off in early Tokyo trading, testing the JPY102 area.  Turnover was quiet and the dollar was largely confined to a JPY102.00-40.  The euro is also trading a bit heavier against the yen.  Support is seen in the JPY131.00-20 range.