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Robust growth lifts hopes for Japan’s economy

Japan's economic growth was revised sharply higher in the first quarter, data on Monday showed, indicating the economy is in better shape than anticipated to weather a rise in the country's consumption tax.

Japan's economy grew 1.6 percent in the January-March period from the previous quarter, revised up from a preliminary 1.5 percent expansion due to faster growth in capital expenditure.

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That translated into annualized growth of 6.7 percent, up from an initial reading of a 5.9 percent rise and above market expectations for a 5.6 percent rise.

"The real surprise in first-quarter numbers is the strength of capex (capital expenditure)," said HSBC Japan Economist Izumi Devalier.

Tokyo, Japan.
Tomohiro Ohsumi | Bloomberg | Getty Images
Tokyo, Japan.

"We knew that consumption was going to be very strong going into the tax hike but what's really encouraging for stock markets is the fact that businesses are becoming more enthusiastic about investing domestically," she added.

Japan raised its consumption tax to 8 percent from 5 percent on April 1 and a spending spree before that tax hike boosted economic activity.

"We are expecting quite a sharp pullback this quarter, close to about 5 percent given how strong the first-quarter numbers were," Devalier said.

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"But I think the good news is that April and May indicators don't show as big a plunge as expected. I think it's still too early to tell how strong the rebound will be in the third quarter, but I think Japan will be able to avert the long-contraction that hit the economy in 1997," she added, referring to the last time Japan hiked its sales tax.

Analysts at Mizuho Corporate Bank said the upward revision to the GDP data suggested investment demand is picking up.

The 6.7 percent annualized rise in Japan's GDP puts it well ahead of most of its peers in the developed world. The U.S. economy contracted at a 1.0 percent annual rate in the first quarter as severe weather took a toll, while the euro zone grew just 0.9 percent.

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Japan's benchmark Nikkei stock index meanwhile rose to its highest level in three months in early Monday trade, bolstered by the GDP data.

"I think there's no doubt that things in Japan are improving but I do feel that we hold Japan to impossible standards," Jeremy O'Friel, managing director at Belmont Investments, told CNBC.

"Namely we know that there's two ways an economy can grow - productivity increases or population growth. From 1945 to the next 40 years, Japan achieved incredible things because of these two factors," he said.

"But the two factors have worked against them for the past 25-30 years. [So] when people talk about the Japanese recovery, I sometimes feel they are comparing it to the 1970s and 80s," O'Friel added.

Separate data released on Monday, showed Japan's current account surplus stood at 187.4 billion yen ($1.83 billion) in April against a median forecast in a Reuters poll for a 322.5 billion yen surplus. It was the third consecutive month of surpluses.

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