Japan economy races ahead on broad-based growth

By David Turner in Tokyo
Published: February 17 2006 01:49 | Last updated: February 17 2006 01:49

Japan’s economy raced ahead at the end of last year according to official figures on Friday, far surpassing the strong growth seen in the US.


The news heightened expectations that the Bank of Japan will end its quantitative easing policy soon – a prelude to raising interest rates. A growing number of economists now believe the central bank will end quantitative easing in April, before pushing for an interest rate increase a few months later. For many, Friday’s growth figures confirmed that view.

Gross domestic product in October to December grew 5.5 per cent in real terms on an annualised basis, and 1.4 per cent quarter on quarter. The US GDP grew by an annualised 1.1 per cent in the same period.

The Cabinet Office also announced at the same time that the economy grew 2.8 per cent in 2005 as a whole – its fastest pace since 2000.

The growth was broad-based. Private sector consumption rose 0.8 per cent, boosted by higher employment and wages. Workers’ total cash earnings, including wages, overtime and bonuses, rose for the first time in five years.

Investment by companies continued to grow rapidly, as companies became more confident about the future. Private-sector capital spending was up 1.7 per cent.

But exports were also strong. External demand – exports minus imports – contributed 0.6 percentage points to the GDP growth figure.

The Japanese government responded in its usual way to continuing strong economic news, by urging BoJ not to change monetary policy too hastily. Sadakazu Tanigaki, finance minister, said mild deflation continued.

Many private-sector economists agree with the government’s cautious stance, arguing that interest rates should not rise before the end of the year to avoid choking off recovery. There is also a popular view that broad-based deflation in the economy has not yet been conquered – another reason not to raise interest rates.