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Last Updated: Friday, 11 November 2005, 10:59 GMT
Domestic sales aid Japan's growth
Shoppers in a Tokyo electronics store
Improved confidence is helping to boost sales in Japan's shops
Japan's economy expanded at a faster-than-expected pace in the third quarter, boosted by strong domestic demand, official figures show.

Japanese gross domestic product (GDP) rose by 0.4% in the three months to September, the Cabinet Office said.

That brought Japan's growth rate for the year to an annualised 1.7%, well above forecasts for a figure of 1%.

Analysts said the pace of growth would help ease deflation, which has gripped the economy for more than seven years.

The Bank of Japan last month predicted that the drawn-out period of falling consumer prices would come to an end - along with its long policy of keeping interest rates at zero.

"Rises in prices may not accelerate, but it's unlikely that they will fall back into negative territory once they start rising," said Bank of Japan governor Toshihiko Fukui.

'Supporting consumption'

The latest robust growth data was welcome news for the world's second-biggest economy, said Masaaki Kanno, chief economist at JP Morgan in Tokyo.

"The Bank of Japan sees potential growth at over 1%, so 1.7% annualised growth is above potential, and if that continues beyond October-December, the output gap will shrink and inflationary pressures will gradually emerge," he said.

While the latest annualised rate of growth beat forecasts, it marked a slowdown from 3.3% in the previous three months.

However, analysts still expect Japan's economy to continue to grow in the final three months of the year.

"Strong corporate earnings are fuelling capital spending and spilling over to the household sector, supporting consumption," said Seiji Adachi, a senior economist at Deutsche Securities.

The rise in third-quarter GDP data helped lift the benchmark Nikkei index to a four-year closing high of 14,155.06 - up 0.53%.

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