Japan, the country synonymous with debt and deflation in recent years, posted the best growth rate among major industrialized nations in the first quarter and some analysts are predicting more upside for the economy from domestic demand.
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Ginza district in Tokyo, Japan
Private and government spending, helped lift Japan’s GDP growth in the January to March quarter to 1.0 percent, just ahead of a median forecast of 0.9 percent, government data showed on Thursday. That translates into annualized growth of 4.1 percent.
“Japan has certainly gone from zero to hero with this release, by far the best figures in the industrialized world,” Dan Slater, Director at Economist Corporate Network told CNBC Asia’s “The Call” on Thursday.
While Japanese growth rebounded in the first quarter, U.S. economic growth slowed to 2.2 percent and the euro zone narrowly avoided a recession.
By contrast, Slater said, Japan is in a “sweet spot”, supported by a recovery in private consumption, robust government spending and strong exports, adding this is likely to continue.
Naomi Fink, Japan Strategist at Jefferies Group, said Japan isn’t finished with the “cyclical upturn.” She told CNBC Asia’s “Squawk Box” that some of the government spending on construction had been delayed till later this year, which could help support growth over the next few quarters.
The latest data showed that a major driver of Japan's expansion was public investment, which grew 5.4 percent after having contracted in the previous two quarters.
Analysts expect private demand to stay strong, especially for housing. Jesper Koll, Managing Director and Head of Japanese Equity Research, JPMorgan Securities Japan, said the country’s banks - flush with cash - are finally seeing demand for loans.
“You've got bank lending, private bank lending growing now for five consecutive months. That’s a domestic credit cycle that's kicking in,” said Koll. “Where's the bank lending coming from? You do actually find a pickup in mortgage demand. That is the younger generation of Japanese having greater job security, seeing their wages grow, and they're stepping up to the plate and they're buying that apartment, they're building that house now.”
But while domestic demand has been strong, analysts caution that the strong yencould weigh on exports. The Japanese currency has strengthened from around 83.50 against the U.S. dollar in mid-March to 80.33 on Thursday as investors have sought safe-haven assets on growing worries about Europe’s debt crisis.
But David Roche, Global Strategist at the research firm Independent Strategy, said Japan faced major problems and its status as an investment safe haven will be short-lived.
“The idea that the yen is a safe haven is about the most unsafe safe haven I have ever heard of,” he said. “This is a country whose fiscal arithmetic makes Greece look like Switzerland, and whose politicians are entirely and completely clueless.”
“Yes, you got a nice growth figure out of Japan for the first quarter,” he said. “But in the end, the economy is not buoyant. It needs devaluation and we will get it.”
By CNBC’s Jean Chua.