Japan's economy grew a stronger-than-expected 1.2% in the last three months of 2006, marking the fastest growth in nearly three years and reviving expectations of an interest rate hike by the Bank of Japan next week.
Gross domestic product (GDP), the broadest measure of the economy, rose 1.2% in October-December from the previous quarter, government data showed on Thursday, beating market expectations of a 0.9% rise.
That translated into an annualized expansion of 4.8% in the fourth quarter, above economists' consensus forecast of a 3.8% rise. It was the eighth straight quarter of growth and far exceeded July-September figures of 0.1% real growth, or 0.3% annualized. In 2006, the world's second-largest economy grew 2.2%.
"This is a strong reading. The solid reading for both consumption and capital investment is noteworthy," said Norihiro Fujito, general manager of Mitsubishi UFJ Securities' investment research and information division. "This will no doubt strengthen the argument for a rate hike by the BOJ next week, though I still think they will not raise rates," he said.
The yen strengthened to 120.31 against the U.S. dollar after the data release from around 120.70 yen. Benchmark June euroyen futures slid as low as 99.295, down 2.5 basis points on the day.
Fourth-quarter GDP growth was led by a recovery in private consumption, which had dipped 1.1% in July-September due largely to bad weather.
Private-sector consumption, which accounts for some 55% of GDP, grew 1.1%, compared with a median market forecast for a 0.8% rise.
Weak personal consumption and consumer prices were among the reasons for the BOJ's decision to leave its overnight call rate target unchanged at 0.25% in December and January. The central bank has kept the rate steady since last July, when it raised interest rates for the first time in six years.
Firmness in business expenditures also kept the world's second-largest economy on a steady growth path. Corporate capital spending grew 2.2%, above the market consensus forecast of a 1.5% rise.
External demand -- exports minus imports -- pushed up overall GDP by 0.2 percentage point due to robust export growth. The GDP deflator, a measure used to derive real GDP from nominal GDP by adjusting for price changes, fell 0.5% in October-December from a year earlier. That compared with a 0.7% year-on-year fall in the previous quarter.
Nominal GDP grew 1.2%, or an annualized 5.0%. The government's target of 1.9% real GDP growth in fiscal 2006/07 can be met even if the economy posts negative real growth of 0.4% in January-March.