Economy logs 2% annualized growth

The economy grew at an annualized 2.0 percent in the July-September period -- roughly twice as fast as the average forecast -- as strong corporate spending and exports offset weak private consumption, the Cabinet Office said Tuesday.

The gross domestic product, the widest measure of economic activity, grew 0.5 percent from the previous quarter. It was the seventh straight quarterly rise.

The figures were much stronger than the average market forecast of 0.2 percent quarterly growth and 1.0 percent annualized expansion.

The strong data gave a boost to share prices, with the Tokyo Stock Exchange's Nikkei average gaining 267.06 points to close at 16,289.55.

"The data reassured the market that the economy is continuing to expand," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute Inc. The GDP figures come on the heels of recent weak economic data for machinery orders and bank lending growth.

During the July-September period, corporate capital spending grew 2.9 percent. It posted a 3.5 percent increase in the last quarter. Private consumption, which accounts for more than half of GDP, dropped 0.7 percent due to cold summer weather that discouraged shopping and traveling.

Exports, one of the key drivers of Japan's economic growth, grew 2.7 percent on brisk demand and the yen's weakness, which increases the earnings of Japanese goods abroad. Imports declined 0.1 percent, however, in part due to weak consumption at home.

With the release of the latest GDP figures, market watchers are shifting their attention to the Bank of Japan's two-day Policy Board meeting that starts Wednesday, looking for an indication as to when the central bank might hike interest rates.

Kumano said that although he needs to monitor the BOJ meeting for clues to the next rate hike, he believes the central bank could make the move as early as next month.

"It is certain the stronger than expected GDP data will make BOJ Gov. Toshihiko Fukui feel upbeat on the prospects for another interest rate hike" following the hike in July, he added.

Finance Minister Koji Omi and Economic and Fiscal Policy Minister Hiroko Ota said the GDP data show that the economy is still growing and the BOJ should continue to support the expansion.

"We'd like the central bank to continue to support the economic growth with monetary policy, although the rate hike decision is up to the BOJ," Omi said in response to a reporter's question.

In July, the BOJ raised its unsecured overnight call rate target by 0.25 percentage point, following its exit from the "zero-interest-rate" policy.

Overall, Kumano of Dai-ichi Life Research Institute welcomed the GDP data. But he expressed concern about growing inventories, including electronic components.

Exports of electronic components to the U.S. reflected in the July-September quarter were geared for production ahead of the U.S. Christmas shopping season, but there may be a problem if inventories continue to rise in the next quarter, he said.

Kumano and other economists warn about the impact of a possible slowdown in the U.S. economy, the key export market for many Japanese blue chips. The U.S. economy grew an annualized 1.6 percent in the July-September period, the slowest rate since the first quarter of 2003.

Kumano was optimistic about the prospects for consumer spending, noting that the dip in the July-September quarter was temporary, caused by bad weather. Ota, however, said the slump in household spending was a worry.

"What made me concerned is sluggish household spending, due in part to stalled growth in wages per person. We need to closely pay attention" to the wage trend, Ota told reporters, adding she expects brisk corporate earnings to continue to spur consumer demand.