Japan economy grows at 4.8%

Japan’s economy expanded at the fastest pace in more than two years in the third quarter, led by a rebound in domestic demand that may ease concern of a return to recession next year.

Gross domestic product rose at an annual 4.8 per cent pace, more than the forecasts of all 20 economists in a Bloomberg News survey, after a 2.7 per cent gain in the second quarter, Cabinet Office figures showed in Tokyo. It was the second straight advance after the nation’s deepest postwar recession.

Faster expansion of the world’s second-largest economy underscores a strengthening global recovery, after reports last week showed accelerating Chinese industrial production and a return to growth in the euro region. At the same time, Japan’s policy makers need to maintain monetary and fiscal stimulus to buttress the rebound, Deputy Prime Minister Naoto Kan said.

“The turnaround in public investment has definitely contributed to the rebound in GDP, so if they do start to cut it’ll weigh on growth,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo.

The yen initially rose, before paring its gains and trading at 89.55 per dollar at 4:16 pm in Tokyo, from 89.60 before the release. The Nikkei 225 Stock Average rose 0.2 per cent. Concern about the economy’s prospects has weighed on equities, with the benchmark gauge dropping 1.7 per cent since the end of June even as companies reported earnings gains.

The median estimate of economists was for a 2.9 per cent annualised expansion. From the previous quarter, the economy grew 1.2 per cent in the three months ended September 30, more than the 0.7 per cent median forecast. Domestic demand accounted for more than half of the increase.

Capital spending climbed 1.6 per cent, more than three times the pace projected by analysts, after its longest rout since at least 1980. Business investment accounts for about 15 per cent of the economy and drove more than a third of Japan’s growth between 2002 and 2007.

Prime Minister Yukio Hatoyama said over the weekend at a meeting of Asia-Pacific leaders in Singapore that the economy remains “worrisome” and another supplementary budget is “probably” warranted.

Kan said that while capital spending is showing signs of bottoming, downside risks to the economy must be watched. He also predicted that the Bank of Japan won’t alter its accommodative stance.