New Economic Report Sparks Hope in Japan

Japan’s economy probably grew for the first time in a year in the first quarter, new data showed Wednesday, in a report that sent Japanese stocks to a nine-month high.

The news also added more fuel to the yen’s powerful surge against the dollar in recent weeks, before the government intervened to halt the rally--with limited success.

Rising exports of cars and an increase in factory production boosted the so-called all-industry index, used as a gauge for gross domestic product, by 0.6% in the first quarter from the previous quarter, a government report showed.

“Japan’s economy has bottomed out, there’s no question about that,” said Yasukazu Shimizu, senior economist at Aozora Bank Ltd.

The Bank of Japan concurred, raising its assessment of the economy. “The pace of deterioration has moderated,” the bank said in its monthly report. “Production is starting to pick up, reflecting the increase in exports.” Still, consumer spending will remain weak, it said.

The news lifted the Nikkei-225 share index 160.82 points, or 1.4%, to 11,961.98, its highest close since August. The index is up 13.5% this year, while the U.S. blue-chip Standard & Poor’s 500 index has fallen 5.4%.

Rising optimism about the potential for a Japanese economic rebound has helped bolster the yen’s value in recent weeks. The yen strengthened from 132 per dollar in mid-April to a five-month high of 124.09 Tuesday.

On Wednesday the yen rallied again, reaching 123.53 per dollar. That triggered the government to sell yen in an attempt to halt the currency’s advance.

“The yen’s rise was too rapid,” Japanese Finance Minister Masajuro Shiokawa said after instructing the Bank of Japan to sell yen.

But international investors bought yen, offsetting the government’s sales, so they could scoop up Japanese stocks as a bet the world’s second-largest economy is pulling out of recession.

The government is “fighting a losing battle” against a stronger yen, said John Taylor, chairman of FX Concepts, which has $4.5 billion under management.

The intervention weakened the yen to 125.06 per dollar, but it rallied again to end at 124.22 in New York, off only slightly from Tuesday’s close.

Before this year’s rally, the weak yen had helped exporters such as Nissan Motor boost earnings, limiting the economy’s slide. A weak currency makes a nation’s exports more affordable for foreign buyers.

The yen’s resurgence will have the opposite effect, potentially raising the cost of exports. That “is negative for profits” of Japanese industrial giants, said Shuichi Yamada, a general manager at chemical firm Nippon Shokubai Co.

“A strong export performance is Japan’s only chance of coming out of recession, so you can understand why politicians are getting a bit twitchy,” said Haydn Davies, who helps manage $800 billion at Barclays Global Investors in London.

But “with the economy improving, it’s going to be difficult for them to keep the yen weakening for any amount of time,” he said.

Meanwhile, the Japanese stock market’s performance, and the yen’s surge, is boosting returns for U.S. investors in Japanese stocks. The Nikkei’s gain so far this year in dollar terms is 20.2%.