Japan growth injection in danger of running out

Japan's economy expanded more than projected in the third quarter, led by a capital-spending rebound in the aftermath of the longest rout since at least 1980.

Gross domestic product rose at an annual 4.8 per cent pace, the fastest since the first three months of 2007, after a revised 2.7 per cent gain in the second quarter, the Cabinet Office said.

The median estimate of 20 economists surveyed by Bloomberg News was for 2.9 per cent growth.

The acceleration in the world's second largest economy is projected to fade in coming quarters as the impact of stimulus spending wanes and job losses restrain consumer spending.

Prime Minister Yukio Hatoyama said the economy remained worrisome and another supplementary budget was probably warranted.

"Growth is still being driven by things that are temporary: the inventory cycle and fiscal stimulus," said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo.

"The main upside is emerging markets, which are doing quite a bit better than a lot of people expected."

The yen rose after the report. The currency's climb of more than 5 per cent against the dollar over the past three months has made Japanese products more expensive abroad.

The Nikkei 225 Stock Average was down 0.2 per cent. Concern about the economy's longer-term prospects has weighed on equities, with the benchmark index dropping almost 2 per cent since the end of June even as companies reported earnings gains.

Investment by companies drove the growth acceleration.

Capital spending rose 1.6 per cent in the three months through September, the first gain in six quarters and faster than the 0.5 per cent median estimate of analysts, the report showed.

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.

Deputy Prime Minister Naoto Kan said after the release 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.

The bank last week kept its benchmark interest rate near zero.

One-third of Japan's factories still sit idle, forcing firms to delay hiring and investment that would help to sustain the revival.

Consumer spending, which makes up about 60 per cent of the economy, climbed 0.7 per cent. Exports increased 6.4 per cent from the previous quarter, in line with analysts' forecasts.

Prime Minister Yukio Hatoyama's Democratic Party of Japan inherited policies that helped prop up spending at home at the cost of increasing a debt that is approaching double the size of GDP. The DPJ last month froze about 3 trillion of the previous government's 25 trillion in stimulus packages, saying it was wasteful, and is now contemplating whether to redeploy the cash this fiscal year.

Finance Minister Hirohisa Fujii said the GDP report would be one of the important factors in deciding whether to compile an extra spending plan in the year ending next March.

Japan's expansion since March doesn't make up the ground lost during the previous four quarters of contraction, when the economy shrank to its 2003 size. Industrial production is still about 20 per cent below last year's level and the slump in domestic demand has depressed consumer prices, which have dropped for seven months.

The Bank of Japan last month forecast deflation will persist through fiscal 2011, leaving little room to raise interest rates. Bloomberg