By Leika Kihara and Tetsushi Kajimoto
TOKYO (Reuters) - Japan's economy expanded at its fastest pace in a year in January-March but growth was inflated by inventory as business investment failed to gather momentum, keeping alive expectations for more monetary stimulus later this year.
Economics Minister Akira Amari said while the economy is seen recovering moderately, some weakness remained in capital expenditure as companies remained cautious of spending their abundant cash.
"In terms of sentiment, Japan hasn't emerged from deflation yet," Amari told reporters after the data's release.
The world's third-largest economy expanded an annualized rate of 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 annualized increase in gross domestic product (GDP) topped a 0.2 percent gain in the United States and 1.6 percent growth in the euro zone in the January-March quarter.
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 PICKING UP
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.
Private consumption, which accounts for roughly 60 percent of GDP, rose 0.4 percent, matching the gain in October-December.
"Consumption was stronger than expected, which is good news for the economy," said Hidenobu Tokuda, senior economist at Mizuho Research Institute.
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 some relief to policy makers even though capex remains fairly subdued.
"Capital expenditure is still a little weak, but it is finally showing signs of life, so we can say the economy is on the recovery path. This is a relief for the government and the BOJ," Tokuda said.
(Additional reporting by Stanley White; Editing by Eric Meijer & Shri Navaratnam)
