Japanese Economy Grows at 5.5% Pace

Japan’s economy grew at an unexpectedly strong 5.5% annual rate in the fourth quarter of 2005, its fourth straight quarter of expansion, as a pick-up in exports added to booming domestic demand and raised hopes for a sustained recovery, data showed Friday.

The strong reading bolstered expectations that the Bank of Japan would end its five-year ultra-easy monetary policy around April, which could pave the way for higher interest rates later in the year.

Nervousness about rates sent Japan’s Nikkei-225 stock index down 2.1% on Friday to 15,713.45, a three-week low. Analysts also noted that some U.S. brokerages, including Morgan Stanley, have turned more cautious on Japanese shares in recent weeks. The Nikkei hit a five-year high of 16,747.76 on Feb. 6.

Gross domestic product grew a price-adjusted 1.4% from October through December compared with the previous quarter, the Cabinet Office said. That exceeded economists’ forecasts of a 1.2% expansion, and translated into 5.5% annualized growth, outpacing forecasts of 5% as well as the 1.1% pace in the United States during the same period.

“It’s a clear stamp of confirmation that the economy is growing very strongly,” said Stefan Worrall, an economist at Credit Suisse. “Although in certain areas, consumption perhaps, we might see some take-back in the first quarter, definitely the economy is driving on all cylinders,” he said.

The growth followed an upwardly revised 0.3% expansion in the third quarter and was the fastest since the 1.5% expansion in the first quarter of 2005.

Japan’s steady recovery started last year, thanks to strong domestic demand, which has overtaken exports as the driver of the economy.

Private-sector consumption in the fourth quarter rose 0.8%, helped by boosts in employment and wages.

Workers’ total cash earnings, which include overtime pay, monthly wages and bonuses, increased for the first time in five years in 2005 while colder-than-usual weather spurred sales of winter clothing and heating equipment last quarter.

The GDP figures also showed a rebound in exports to primary markets such as China and the United States. External demand -- exports minus imports -- contributed 0.6% to GDP growth in the December quarter after making no contribution in the July-through-September period.

Private-sector capital spending was strong, rising 1.7% in the quarter.

Despite the generally healthy data, a price index in the GDP report fell 1.6% in the quarter, suggesting that deflation pressures persist. The yield on the 10-year Japanese government bond fell to 1.52% from 1.57% Thursday as some traders bet that the Bank of Japan wouldn’t be in a hurry to tighten credit.