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Japan's Economy Grows Faster-Than-Expected

Reuters
Wednesday, 13 Feb 2008 | 8:32 PM ET

Japan's economy grew 0.9 percent in the last quarter of 2007, double the expected rate, but a likely slowdown this year meant analysts still saw the Bank of Japan keeping interest rates on hold in 2008, or possibly cutting them.

The quarterly growth was much stronger than the expected 0.4 percent rise, due to strong capital expenditure and exports, government data showed.

The bullish growth -- an annual pace of 3.7 percent compared with an annual growth rate of just 0.6 percent in the United States in the October-December quarter -- pushed Japanese stocks up 3 percent and sent bonds lower amid hopes that Japan might avoid a recession.

But economists said the growth might be the last hurrah for the economy before it turned down in 2008.

"The figures were strong but it is unlikely the Bank of Japan will change the direction of its policy decisions," said Yasuhiro Onakado, chief economist at Daiwa SB Investments. "The Bank of Japan will likely keep open the option of keeping the current interest rate levels or even rate cuts as situations got a lot worse since January and on growing uncertainty about the economy."

The data follows a pessimistic outlook from financial chiefs in the Group of Seven industrialized countries when they met in Tokyo on Saturday, amid fears of a recession in the United States in the wake of the credit crisis.

Investors expect the BOJ to stand pat on rates at its policy review on Friday, when it is expected to assess the slowing U.S. growth and fallout from the deepening credit crisis.

Markets Move

Japanese government bond futures fell nearly half a point on the upbeat growth figures, but financial markets are still flirting with the idea of a BOJ rate cut.

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Swap contracts on the overnight call rate are pricing in about 30 percent chance of easing later this year, down from about 40 percent before the GDP data came out.

The BOJ has so far stuck to the view that the Japanese economy is likely to expand steadily in the fiscal year from April, saying the economy is slowing down only temporarily.

But some economists suspect the central bank may have to revise down its economic forecast when it reviews its twice-yearly economic outlook report in April.

The GDP data showed exports driving the world's second-largest economy thanks to shipments of cars and software, with net exports contributing 0.4 percentage point of the 0.9 percent growth. Exports grew for the 11th consecutive quarter.

Domestic demand contributed 0.5 percent point of the growth, lagging corporate capital spending growth of 2.9 percent.

Japanese exports have so far held steady despite the slowdown in the U.S. economy from late last year, thanks to strong demand in Asia and other emerging economies.

Export Fears

But as weak U.S. economic data in recent weeks has stoked fear of a U.S. recession, many economists worry that Japan may not be able to count much longer on exports.

That in turn could curb corporate capital spending, possibly jeopardizing the Bank of Japan's view that strength in corporate activity will spill over to households.

Personal consumption -- which accounts for more than half the economy -- grew 0.2 percent, marking the fifth straight quarter of growth, led by demands for kerosene, electricity and air conditioners thanks to cold weather.

Also boosting growth, the GDP deflator fell 1.3 percent.

A housing slump after the government tightened building rules last year remained a big drag on growth. Housing investment fell 9.1 percent in the quarter.

Although economists expect the impact of the new rules is likely to taper off from the first quarter of this year, it is still not clear how quickly housing investment will recover.

For the whole of 2007, GDP grew a real 2.1 percent, marking the eighth straight year of expansion.