Japan's consumer recovery may spark rise in interest rates

Japan's consumers are finally bouncing back after years in the doldrums, government figures showed yesterday.

The world's second biggest economy expanded at an annual rate of 4.8 per cent in the fourth quarter of last year, bolstering expectations that the Bank of Japan will lift interest rates at its meeting next week.

It was the eighth successive quarter of growth - and the fastest pace for nearly three years - reinforcing views that the country is on a solid recovery path. The news propelled the yen to its strongest against the dollar for over a month.

Consumer spending, which accounts for more than 50 per cent of total economic activity, led the way as the Japanese splashed out on travel, flat-screen televisions and mobile phones after years of austerity. Cheaper heating oil and a mild winter freed up money for spending, the government said.

"This is a strong reading," said Norihiro Fujito, general manager of Mitsubishi UFJ Securities' research division in Tokyo. "The solid reading for both consumption and capital investment is noteworthy. This will no doubt strengthen the argument for a rate hike by the BOJ next week, though I still think they will not raise rates."

Consumer spending has been astonishingly weak, despite the fact that Japanese businesses have been quite profitable. However, they have ploughed this money into investment, rather than paying their workers more. The figures showed that investment spending remains strong thanks to solid demand for software, general machinery and high-tech equipment such as car navigation systems. External demand - exports minus imports - also contributed to the growth as the weak yen boosted exports.

Despite the punchy growth, some experts still have reservations about a rate hike next week, pointing to recent weakness in prices and wages. A Reuters poll of 49 traders and analysts in Tokyo's foreign exchange and bond markets showed 24 expect the BOJ to raise rates by a quarter-point to 0.5 per cent next Wednesday, while five expect a hike in March. The central bank has kept borrowing costs steady since last July, when it raised them for the first time in six years.

Taro Saito, senior economist at NLI Research Institute, said: "The data provide tailwinds for the BOJ. Given that three board members already supported a rate hike last month, the chances of a move next week have risen."

Shoichi Nakagawa, policy chief of Japan's ruling Liberal Democrat Party and a vocal opponent of a rate hike, said the data did not change his view on economic conditions, arguing that the current growth was "fragile".