Japan's economic growth unexpectedly picked up pace in the first quarter thanks to firm exports and consumption, allaying fears that deepening global financial market problems may take a toll on the world's second-largest economy.
But analysts warn that the expansion is likely to lose steam this quarter as companies are increasingly cautious on investment due to uncertainty over the global economic outlook, meaning there is little chance of an immediate interest rate hike by the Bank of Japan.
"The figures are a little bit stronger than expected, but there are not many surprises as the contribution from overseas demand is higher and domestic consumer spending had the benefit of the leap year," said Yasuhiro Onakado, chief economist at Daiwa SB Investments. "I believe the Bank of Japan will keep its stance of leaving interest rates as they are for a while."
Gross domestic product grew 0.8 percent in January-March from the previous quarter, preliminary government data showed on Friday, beating market expectations for a 0.6 percent increase.
That followed a revised 0.6 percent expansion in October-December and beat euro zone first-quarter growth of 0.7 percent.
It was the third straight quarter of growth, and on an annualized basis the economy grew 3.3 percent, much higher than the nation's estimated potential growth rate of about 1.5 percent and above the U.S. economy's annualized 0.6 percent in the same period.
The yen inched up against the dollar after the data, while Japanese government bond futures and stocks initially rose but then fell back.
Exports made up the bulk of the surprising growth in the quarter, with external demand contributing 0.5 percentage point of the 0.8 percent growth.
Despite a slowdown in the United States, exports kept up momentum in the quarter, thanks to still-booming emerging economies, providing solid support to the overall growth.
Also underpinning growth in January-March was a 0.8 percent rise in private consumption, which makes up about 55 percent of economic activity. That was up from a revised 0.4 percent rise in October-December.
Private consumption grew for the sixth straight quarter and marked the biggest gain since October-December 2006, when it grew 1.1 percent.
But economists said not to read too much into this because of an extra day of spending in February due to 2008 being a leap year.
Private housing also pushed up overall growth, rising for the first time in five quarters as the negative impact of tighter building regulations that clogged up construction approvals since last year tapered off.
Economists added that the Japanese economy may not be able to count on exports in the second quarter.
"We'll probably see a gradual slowdown in export growth given that we're starting to see emerging economies tightening monetary policy to cap inflation," said Yasuo Yamamoto, senior economist at Mizuho Research Institute.
The corporate sector also cast a cloud over the economic outlook.
Corporate capital investment, which accounts for around 16 percent of GDP, fell 0.9 percent from the previous period, contrasting a revised 0.9 percent rise in October-December.
Brisk business has been a key engine of Japan's economic growth but companies are getting increasingly cautious in light of soaring oil and raw materials costs and economic troubles in the United States, Japan's second-largest trading partner after China.
Data on Thursday showed core machinery orders, an early gauge of capital spending, underscored flagging corporate investment, adding to worries about sputtering domestic growth.
Companies' profits have also been squeezed as firms were unable to fully pass on rising costs to tight-fisted consumers.
Facing the prospect of weakening growth as rising raw material costs bite, the central bank is widely expected keep its key overnight call rate target unchanged at 0.5 percent at a two-day policy meeting that ends next Tuesday.
At its last meeting in late April the BOJ gave up a two-year bias towards raising rates and stressed downside risks.
Immediately after the GDP data, swap contracts on the overnight call rate showed that investors saw a roughly 60 percent chance of the BOJ hiking rates by the end of the year, up from about 35 percent earlier this week.