What to expect from Japanese economy's April figures

Expect only a modest recovery, says analyst.

According to DBS, the major economic data for April are due to release tomorrow, including industrial production, CPI and joblessrate. We think data will show that the Japanese economy has maintained a modest recovery trend into 2Q.

Here's more:

Consumption has remained an important growth driver, thanks to stronger consumer confidence and positive wealth effects. April’s retail sales (out yesterday)rose more than expected by 0.7% MoM sa.

Growth contributionsfrom investmentshould also begin to increase from 2Q, due to the execution of supplementary budget. New contracts of public workssurged near 40% YoY in April.

While the real economy isimproving,the financial market volatility hasincreased recently. The Nikkei hasfallen 8% compared to the peak level one
week ago. The JGB 10-year yield hasrisen 30bpsthis month, and a cumulative 40-50bpsif compared to the bottom in April (when the BOJ announced quantitative and qualitative easing).

The correction in Nikkei is nottoo surprising, given its very strong and one-way rise forsix consecutive months. If the recent gains in bond yieldsreflectthe expectations of better growth and inflation prospects, it may not be a big worry either. Thusfar, the average level of equity price indicesin Jan-May remains 30% higherthan the average level in 2012.

The year-to-date JGB yields are lowerthan the 2012 levels. It remains too early to predict negative consequences on the real economy as a result of
recent market volatility.

Going forward,the challenges are whetherthe government’s long-term growth strategy (due June) and fiscal reform plan (due September) will be able to bolster investor confidence about Japan’s growth prospects and address their concerns about Japan’sfiscal health. A credible reform plan is needed to avoid a deeper correction in the equity and bond markets.