May 20, 2:03 AM EDT

Japan economy gathers pace in first quarter as recovery takes hold, but uncertainties remain

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TOKYO (AP) -- Japan's economy grew at a faster-than-expected 2.4 percent annual pace in the January-March quarter, suggesting a recovery is gaining traction despite persisting weakness in corporate and household spending.

About 2 percentage points of the first quarter's growth reflected an increase in inventories stemming from the plunge in demand that followed a sales tax increase in April 2014. An increase of 7.5 percent in housing investment also drove growth.

Overall trends for the economy are positive, said Masamichi Adachi, an economist with JPMorgan in Tokyo. Lower costs for oil and gas imports thanks to the plunge in crude oil prices as one big plus, he said.

"We see a huge income shift from the oil exporters to the importers like Japan," he said. A windfall for corporate profits from the yen's depreciation against other currencies is also helping.

"People's confidence is getting a little better," he said.

But there is still little sign of the kind of increase in consumer and business spending needed for a sustainable recovery, he said.

The data reduce the likelihood the Bank of Japan will opt to expand its lavish monetary stimulus at a policy meeting later this week.

The 0.6 percent rise in GDP from the previous quarter was the second straight quarter of growth. Economists had mostly forecast growth for the first quarter at about 1.5 percent.

The news pushed share prices higher, lifting the Nikkei 225 index by 1.0 percent to 20,231.18. The index recently breached the 20,000 level for the first time in 15 years, buoyed by strong corporate profits and from pension funds and other institutional investors rotating cash into shares from other asset classes.

Economists are divided over whether the recovery is finally on track after years of tepid growth.

The increase in private sector inventories in the last quarter suggests persistent weakness in domestic demand. Exports also were a net drag on growth.

Public investment plunged 5.5 percent, though real incomes rose 0.6 percent, helping to underpin demand.

More than two years after Prime Minister Shinzo Abe launched his recovery platform heavy on monetary stimulus, 2 percent inflation remains elusive; wage increases have been scant and corporations have held back on investing at home, wary of slow growth in a shrinking domestic market as the population ages and shrinks.

Abe and other leaders say sustained growth depends on companies passing on more of their rising profits to consumers in the form of bigger wage hikes.

"The keys to growth are the extent of the benefits from low oil prices and wage increases at large companies flowing into the broader economy," said Harumi Taguchi, principal economist at IHS Global Insight in Tokyo.

"Additionally, the government needs to accelerate deregulation and structural reforms to support stronger private demand," she said.

Factors contributing to the recovery include a sharp rise in spending by foreign tourists, lured by the cheap yen. Housing investment also has revived as changes in regulations encourage demolition of older, unoccupied homes.

Nearly 14 percent of houses in Japan are vacant, abandoned by elderly occupants and left standing due to rules that charge six times the tax on vacant land as on land that is occupied. Recent reforms have enabled local authorities to inspect vacant houses and designate some as exempt from such tax advantages.

"Since the Vacant Houses Act was enacted some owners are beginning to take action. Many companies, real estate and securities companies are getting involved," said Hidetaka Yoneyama, a researcher at the Fujitsu Research Institute's Economic Research Center.

Though housing investment remains a relatively small part of the economy, in Tokyo's suburbs, many such homes are being cleared and redeveloped. Unlike the U.S. and other major economies, Japan's housing market is skewed toward construction of new homes, and much of the aging, postwar housing stock is decrepit and due to be replaced or demolished.


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