TOKYO—The Bank of Japan said domestic demand rather than overseas exports was the driving force for economic growth for the first time in at least 20 years, as the euro-zone crisis and slow U.S. growth continue to suppress global demand.
The BOJ upgraded its overall assessment of the economy, crediting activity following the March 2011 earthquake and tsunami in northern Japan.
"Japan's economic activity has started picking up moderately as domestic demand remains firm, mainly supported by reconstruction-related demand," the central bank said in its monthly report.
A rise in domestic demand would be a welcome development for the BOJ, because wage growth is seen as the best way to break the long-running deflationary cycle that has seen price rises remain around zero.
Still, the BOJ remains cautious about prospects overseas as the euro-zone crisis sparked by Greece continues to grind away. "There remains a high degree of uncertainty in the global economy," the BOJ said, adding that particular attention should be paid to "developments in global financial markets" amid the European debt crisis.
After the collapse of the asset-inflated bubble in early 1990s, growth in Japan's economy has almost always been driven by its strong exports, as domestic demand largely stagnated. But it appears that things are different this time, as global demand falters amid the euro-zone debt crisis and continued weak growth in the U.S.
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Domestic demand is being fueled by a total of ¥19 trillion ($240 billion) in public-works spending over the next five years, a key factor in creating a 4.7% annualized growth rate in gross domestic product for the first quarter.
The consensus among private-sector economists is for a slowdown in growth to around 1.9% annually in the April-June period, but they don't see a return to an overall economic contraction. Instead, consumer spending, which accounts for about 60% of the economy, has firmed as people buy eco-friendly and fuel-efficient cars and housing.
Consumers now appear more willing to undertake discretionary spending following self-imposed restraint after last year's disasters.
"There is no doubt that domestic demand is now the key driver," said a person familiar with the BOJ.
Some private-sector economists say the economy could be supported, at least for this year, without a surge in exports. With Japan's long-running deflation, individual wages were stagnant in 2011, falling 0.2% from a year earlier.
"Exports are unlikely to be a factor that drags down the economy," said Akihiko Suzuki, chief economist at Mitsubishi UFJ Research & Consulting. "The focus is on whether or not wages will increase" to facilitate a self-sustainable recovery, he added.
The authorities aren't banking on an "export-free" recovery, saying that the traditional reliance on exports is still a critical factor, representing 15.1% of GDP for the fiscal year ended March.
The central bank sees a rise in exports and production as a precondition for the Japanese economy to embark on a full-blown recovery. "Japan's economy is expected to return to a moderate recovery path as domestic demand remains firm and overseas economies emerge from a period of deceleration," it said.
Write to Tatsuo Ito at tatsuo.ito@dowjones.com
Bank of Japan, Japan, BOJ, domestic demand, overseas exports, global economy, gross domestic product, global demand, Mitsubishi UFJ Research & Consulting, economic growth, debt crisis
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