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Last Updated: Tuesday, 18 May, 2004, 16:07 GMT 17:07 UK
Japan's growth beats estimates
Japanese shoppers
Japanese consumers are key to a continuing recovery
Japan's economy, the world's second-biggest, grew faster than expected in the first quarter as companies and consumers increased spending.

In the first three months of this year, gross domestic product increased by 1.4% from the previous quarter for an annualised rate of 5.6%.

It was the eighth straight quarter of growth and topped analysts' estimates for annualised expansion of 3.6%.

Stocks rebounded from a three-month low in Tokyo on the news and the yen rose.

According to chief cabinet secretary Hiroyuki Hosoda the outlook is improving.

"Considering the current situation, I think we will be able to have a rather bright outlook," he said.

Cautious forecasts

It was not all good news, however, with some analysts warning that record oil prices, interest rate hikes in the US, and measures to cool China's economy may threaten growth later this year.

"We expect growth to slow down in the next quarter as various negative factors surface," said Kenji Arata of Informa Global Markets.

While there were signs that demand for imports increased during the first quarter, Japan's growth was largely due to sales overseas.

"This data would suggest that the economy is still looking pretty strong overall, even if it is still primarily being driven by export growth," said Peter Morgan of HSBC Securities.

"Consumer spending and private capital investment were the upward surprises."

Strong sales of products such as cars and flat screen televisions boosted company profits, allowing firms to lift spending and consumers to keep shopping.

Business investment, according to Tuesday's report, increased by 2.4% in the first quarter.

Private consumption, the biggest contributor to economic growth, rose by 1%.

Tokyo's Nikkei stock index closed nearly 2% higher on Tuesday at 10,711.09.

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