Japan's economy grows at fastest pace in a year

TOKYO (Reuters) - Japan's economy grew at its fastest pace in a year in January-March on modest increases in consumption and capital expenditure, adding to evidence the country is steadily emerging from last year's recession.

The world's third-largest economy expanded an annualized 2.4 percent in the first three months of this year, more than a median market forecast for a 1.5 percent increase and following a revised 1.1 percent expansion in October-December, data from the Cabinet Office showed.

The upbeat GDP reading could be a source of solace for policymakers, who are hoping that companies will boost capital expenditure and wages enough to reflate the economy and put it on track for a sustained exit from deflation.

The annualized increase in gross domestic product (GDP) was bigger than a 0.2 percent gain in the United States and 1.6 percent growth in the euro zone in the January-March quarter.

On a quarter-on-quarter basis, Japan's GDP grew 0.6 percent in the first three months of this year, more than a 0.4 percent increase expected in a Reuters poll.

The data will be closely scrutinized at the Bank of Japan's two-day rate review that ends on Friday. The central bank is widely expected to maintain its massive stimulus program and rosy assessment of the economy.

Private consumption, which accounts for roughly 60 percent of GDP, rose 0.4 percent, matching the gain in October-December.

Capital spending grew 0.4 percent, less than an expected 0.8 percent gain but marking the first rise in four quarters, the data showed.

A pick up in business investment is seen as crucial to sparking sustained economic growth and inflation, so the latest numbers should come as a relief to policy makers.

External demand knocked 0.2 percentage point off growth, as hefty imports more than offset exports boosted by a weak yen, resulting in a slightly negative external contribution.

(Additional reporting by Stanley White; Editing by Eric Meijer & Shri Navaratnam)