February 15, 2003	Saturday	Zul Hijjah 13, 1423

TOKYO, Feb 14: Japan defied expectations on Friday by announcing the economy continued to grow through to the end of last year on resilient private spending and rising exports.

On the same day, the Bank of Japan (BoJ) voted to leave monetary policy unchanged, despite mounting political pressure to adopt more aggressive measures to fight deflation, which acts as a drag on economic growth.

Attention is now focused on who Prime Minister Junichiro Koizumi will nominate to replace BoJ governor Masaru Hayami, who is due to retire next month, with expectations of fresh monetary action rising as the economy is seen shifting into reverse in the coming months, analysts said.

Gross domestic product (GDP) in the December quarter slowed to 0.5 per cent from the three months to September when it expanded a revised 0.7 per cent.

But the figure contrasted sharply with private economist expectations of around a 0.4 per cent contraction, boosting stock prices and the yen.

“It’s a surprise, it was totally out of the range of economists surveyed,” said JP Morgan chief economist Masaaki Kanno.

On an annualized basis, the world’s second-biggest economy expanded 2 percent in October-December.

“The main surprise was a much stronger than expected private consumption figure,” said Dresdner Kleinwort Wasserstein (DKW) economist Shuji Shirota.

Private consumption, which accounts for about 60 per cent of GDP advanced 0.1 per cent in the three months to December, much slower than the 0.8 per cent rise seen in July-September, but remaining in positive territory despite fears over a slump in wages and growing unemployment.

Investment by companies on factories and equipment also contributed to the sustained growth, although economists had warned such expenditure would wane as firms focus on clearing up interest-bearing debts.

In October-December, capital expenditure rose 1 per cent, up from a 0.8 percent expansion in the third quarter.

Furthermore, external demand was a key economic driver, with exports jumping 4.5 per cent over the period, up from a slim 0.1 per cent increase in the three months to September.

With all figures surpassing market expectations, the government said Japan could achieve its growth target of 0.9 per cent for the financial year to March even if the economy shrinks by as much as 3.3 per cent in the current quarter.

But ministers remained doubtful about future prospects.

“The bottom-line of the economy is still firm, however, we are not optimistic at all,” Chief Cabinet Secretary Yasuo Fukuda told a news conference.

“It is very important to speed up structural reforms, implement the 2002 extra budget and pass the 2003 budget bill as quickly as possible,” he said.

JP Morgan’s Kanno expects a payback in the first and second quarter of this year as salaries slump and companies continue to tighten their belts.

“Forward-looking data... shows the economy has stabilised and sentiment is deteriorating,” he said.

A quarterly Cabinet Office survey released on Thursday revealed corporate capital spending was expected to fall 3.4 per cent in the three months to March from the previous year, before plunging 14.6 per cent in April-June.

Concerns about a possible US-led war in the Gulf coupled with a likely slump in major economies such as the United States may also hurt Japanese exports.

“In two weeks time we will see the trade figure for January and we expect to see a 30 per cent decrease year-on-year (in the trade surplus),” said DKW’s Shirota, noting this would mark the first such drop in 11 months.

“Exports are losing steam,” he said.—AFP