Japan GDP grows as capital spending revives

TOKYO (Reuters) - Japan's economy expanded at the fastest pace in two quarters in October-December as an export recovery spurred capital spending, but analysts say growth will slow down on cuts in public works spending and as consumption tapers off.

Economists say there is little chance Japan will fall back into recession as an expected acceleration in exports and government payouts to households with children in the second half of this year should underpin growth.

But the government is unlikely to take much comfort in the 1.1 percent quarterly GDP rise because few economists expect growth to increase rapidly as an aging population, falling wages and a large gap between supply and demand push down prices.

That leaves Japan's policy-makers facing a question they so far haven't answered convincingly, which is how to achieve high growth when the country's debt burden limits the ability to pump-prime the economy and when the central bank has exhausted its conventional monetary policy options.

"Capital spending has turned positive, household consumption is strong and exports continued to rise. Japan's economy is doing fairly well in its early stage of recovery," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.

"But it's hard to determine the outlook. Public works spending has fallen for two straight quarters and the outlook for private consumption is uncertain until the effect of government payouts to households with children begins to show."

The fourth quarter growth was the fastest since a 1.3 percent expansion in April-June 2009. Revised data showed Japan's economy ground to a halt in July-September.

The increase in the fourth quarter was also bigger than a median market forecast for a 0.9 percent rise, and translated into an annualized rise of 4.6 percent, beating a 3.7 percent forecast.

The U.S. economy grew at an annualized clip of 5.7 percent in the same quarter, while the euro zone economy expanded 0.1 percent on the quarter.

Japan's expansion was led by domestic demand, which contributed 0.6 percentage point to growth. This was the first positive contribution in seven quarters as a recovery in exports and subsidies for energy-efficient goods fueled domestic capital expenditure.

Corporate investment rose 1.0 percent, the first gain since January-March 2008 but less than a median estimate for a 1.5 percent gain.

Private consumption gained 0.7 percent, faster than a 0.6 percent rise in the previous quarter and more than double the median estimate for a 0.3 percent gain as government subsidies on cars and electronics that consume less energy lured shoppers.

Economists say private consumption could slow in the first half of this year as salaries and bonuses aren't likely to start rising until the second half of the year.

External demand contributed 0.5 percentage point to gross domestic product (GDP) growth, matching the median estimate and more than a 0.3 percentage point contribution in the previous quarter.

The data also showed that public investment fell 1.6 percent in the fourth quarter, after falling by the same amount in the third quarter, as the government trims public works spending.

Economists polled by Reuters before the release of the fourth quarter GDP said they expected growth to slow to 0.3 percent in January-March and 0.4 percent in the following quarter partly as the effects of stimulus begin to taper off.

The Bank of Japan concludes a two-day monetary policy meeting on February 18, where investors are focusing on whether the central bank will extend a three-month fixed rate funding operation it first offered in December.

BOJ policy board member Seiji Nakamura already played down the impact of extending the funding operation when he said on February 4 that increasing liquidity alone will not pull Japan out of deflation.