Japan GDP grows more than expected in Q4 2007

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

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

The bullish growth - an annual pace of 3.7 per cent compared with an annual growth rate of just 0.6 per cent in the United States in the October-December quarter - pushed Japanese stocks up 3 per cent 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 data follows a pessimistic outlook from financial chiefs in the Group of Seven industrialised 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 US 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.

Swap contracts on the overnight call rate are pricing in about 30 per cent chance of easing later this year, down from about 40 per cent 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.

Economics Minister Hiroko Ota said: 'The US economy is slowing down. There is a good chance of Japan's economic growth slowing temporarily'.

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 per cent growth. Exports grew for the 11th consecutive quarter.

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

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

Export fears
But as weak US economic data in recent weeks has stoked fear of a US 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 jeopardising the BOJ'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 per cent, 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 per cent.

A housing slump after the government tightened building rules last year remained a big drag on growth. Housing investment fell 9.1 per cent 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 per cent, marking the eighth straight year of expansion.