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Japanese Economy Sees Robust Growth

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Spotlight On: Japan's Economy
TOKYO—Japan's economy grew faster than expected in the first three months of the year on resilient capital spending and consumption, fuelling expectations that the Bank of Japan may soon end an era of zero interest rates.

Gross domestic product (GDP) expanded 0.5 percent in real, price adjusted terms in the January-March quarter from the previous quarter, Cabinet Office data showed on Friday.

Market forecasts had centered on a rise of 0.3 percent.

The expansion translated into an annualized rate of 1.9 percent, nearly double the consensus forecast of 1.1 percent, although it was well below the previous quarter's 4.3 percent increase and U.S. first-quarter growth of 4.8 percent.

"The figures provide support for the Bank of Japan. Although speculation of a June rate hike has receded, our main scenario is for a July move," said Takehiro Sato, economist at Morgan Stanley.

The BOJ's monetary policy board is due to end a two-day policy-setting meeting later on Friday.

The central bank is not expected to change monetary policy just yet, but bond yields and the yen have been rising steeply over the past two months in anticipation of an interest rate increase in the coming months.

The yen jumped about a quarter percent to around 110.45 to the dollar immediately after the GDP figures. It was at around 110.75 yen by late morning.

The Tokyo stock market's Nikkei average extended losses below the 16,000 level after opening lower, depressed by a global equity sell-off this week, while Japanese government bond futures jumped 0.50 point to 132.80, taking their cue from weak stocks.

Modest but Long Recovery Cycle

While first-quarter growth rate was far from stellar, Japan's economy is now enjoying its second-longest growth cycle of the postwar era, outlasting the 51-month "bubble" boom that ran from December 1986 to February 1991.

Economics Minister Kaoru Yosano remained confident.

"There is absolutely no change in our basic view of the economy," Yosano told a news conference. "The economy is maintaining a strong trend."

Other ministers concurred, saying the current economic recovery supported by domestic private demand would continue.

If the recovery runs until November, it will surpass the "Izanagi" boom of the late 1960s, named after a god in an ancient myth about the birth of the nation.

For the fiscal year 2005/06 that ended on March 31, the economy grew 3.0 percent, more than achieving the government's forecast of 2.7 percent expansion. It was the first time the economy had expanded by 3 percent since the current data calculation method began a decade ago.

It was also well above Japan's potential growth rate, generally thought to be around 1.5 to 2 percent.

Private-sector consumption, which accounts for some 55 percent of economic activity, rose 0.4 percent from the previous quarter, exceeding forecasts of a 0.1 percent gain.

Corporate capital spending increased 1.4 percent, far above forecast rise of 0.1 percent.

The GDP deflator—a tool used to derive real GDP from nominal GDP by adjusting for price changes—fell 1.3 percent from the same quarter a year earlier.

The deflator is one of indicators that the government watches to determine if Japan has fully emerged from years of deflation.

"With the deflator still hovering around these negative levels, it will be difficult for the BOJ to raise rates, in part since political interests can use this figure to argue that it remains early to raise rates," said Soichi Okuda, senior economist at Sumitomo Shoji Research.

Cabinet ministers said the economy was still mired in mild deflation but they also pointed to some improvement.'

Shinzo Abe, the top government spokesman, said he expected the pace of declines in the GDP deflator to slow and noted that the domestic demand deflator, which was nearly flat, was improving.

External demand—exports minus imports—had a net neutral impact on growth as rising imports on high oil prices offset a steady growth in exports.

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