Japan Q4 growth seen quickening on shopping spree before tax hike

TOKYO (Reuters) - Japan's economic growth is expected to have quickened at the end of last year as consumers ramped up spending ahead of a planned sales tax hike, but analysts say that Tokyo may have to inject fresh stimulus to brighten the outlook.

Lukewarm exports and wages growth have undercut some of the economic gains of the past year, and recent turmoil in emerging markets have also raised worries that Japanese shipments may fail to pick up the pace.

The median from a Reuters poll of 26 economists forecast Japan's economy to have grown 0.7 percent in the October-December quarter from the previous three months.

That would be faster than a 0.3 percent expansion June-September and mark the fifth consecutive quarter of growth. The median translates into an annualized increase of 2.8 percent. The Cabinet Office will release the data on Monday.

"What's driving growth is rush demand before the tax hike and capex gains," said Hiroshi Shiraishi, senior economist at BNP Paribas Securities.

"The rebound in consumption after the tax hike could be subdued as wage growth remains fairly subdued. The government may have to pursue some form of stimulus."

The Reuters survey found that Japan's economy picked up momentum in October-December as consumers rushed to buy cars, houses and durable goods to avoid paying more after an increase in the sales tax scheduled for April.

Encouragingly, capital expenditure is also expected to have risen at the fastest pace in two years as companies divert some of their rising profits to investment on assembly lines and equipment.

Prime Minister Shinzo Abe's aggressive drive to jolt the world's third-biggest economy from a decades-long slumber has combined massive fiscal and monetary expansion, triggering an euphoric rise in stocks and a steep fall in the yen.

His policies, dubbed Abenomics, have helped Japan's economy speed past many of its Group of seven counterparts last year.

Growth could accelerate further in January-March, but some economists are cautious because wages may not be strong enough to support spending after the tax hike. The relatively weak exports could also become a bigger headwind to growth.

Japanese stocks have also pulled back recently after booming over 50 percent last year, partly hurt by global growth concerns.

HEADWINDS

The government will increase the sales tax in April to 8 percent from 5 percent, which is expected to encourage even greater spending in the current quarter.

In January new car sales hit the highest in 17 years, up for the fifth consecutive month as consumers purchased big-ticket items before the tax hike. Housing starts have also accelerated from October last year.

Private consumption, which makes up about 60 percent of the economy, was seen growing 0.7 percent in October-December, according to the poll, faster than the 0.2 percent growth in the previous quarter.

Capital expenditure, a weak link in Japan's rebound so far, is forecast to have risen 1.9 percent in the fourth quarter, which would be the quickest growth in two years.

That would show business investment finished strongly last year, but a closely-watched leading indicator of capital expenditure suggests companies could turn more cautious this year due to worries about consumer spending.

On Wednesday, machinery orders, a leading indicator of capital spending, suffered a 15.7 percent slump in December, stoking further doubts about the manufacturing sector's contribution to Japan's economic revival.

External demand is expected have taken 0.4 percentage point from growth over October-December, following a 0.5 percentage point subtraction in the previous quarter, the poll showed.

The negative contribution is due partly to Japan's strong domestic demand, which is boosting imports.

However, some economists worry that net exports could subtract from growth this year as companies continue to look for low-cost centers outside of Japan to produce their goods, which means they ship less from Japan.

Recent turmoil in some emerging markets has also raised concern about an external shock that could harm Japan's exports.

Earlier this month parliament approved a 5.5 trillion yen stimulus package that Abe's government will use to soften the blow from the sales tax hike.

The package relies on public works spending, but recent delays in government construction projects due to labor shortages could slow the pace of future public works.

Bank of Japan Governor Haruhiko Kuroda has dismissed the need for additional monetary easing as consumer prices are headed toward its 2 percent inflation target and as overseas economies recover.

The BOJ announced a huge stimulus program in early 2013 and prefers not to ease again unless the sales tax hike causes far more economic pain than expected.

(Editing by Shri Navaratnam)

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