Japan's economic growth cools; interest rates held steady

May 17, 2007, 12:18 GMT

Tokyo - Japan's economy saw its ninth-straight quarter of expansion with an annualized growth rate of 2.4 per cent in the firstquarter, but the figure was substantially less than the previous quarter, the government said Thursday.

Japan's central bank later unanimously decided to leave its benchmark interest rate unchanged at 0.5 per cent.

The 2.4-per-cent rise in the gross domestic product (GDP) was slower than the fourth quarter's 5-per-cent rate. Although the Cabinet Office lowered the October-to-December reading from 5.5 per cent Thursday, it was still the biggest expansion logged in three years.

A primary reason for the slower growth from January to March in the world's second-largest economy was corporate cuts in capital spending amid fears of a slowdown in the United States, Japan's largest export market.

The growth was slightly lower than economists had expected and contributed to the consensus that the Bank of Japan would hold its benchmark interest rate steady.

The last time the nine-member policy board raised the overnight lending rate was in February, but bank Governor Toshihiko Fukui said last week that interest rates were 'excessively low' when compared with the strength of Japan's economy down the road and they would have to go up if the country was to avoid overinvestment and inflation.

Among Fukui's concerns was rising consumer spending. In the Cabinet Office's GDP report Thursday, consumer spending, which accounts for more than half of Japan's GDP rose more than expected, contributing to expectations that it would help soften the impact of a cooling US economy on Japan.

Consumer spending was up 0.9 per cent, and exports also helped the GDP growth, rising 3.3 per cent on higher demand in other parts of Asia. Imports were also up 0.9 per cent.

Capital spending by companies, however, fell for the first time in five quarters, down 0.9 per cent. An increase had been predicted.

In non-annualized terms, Japan's economy grew 0.6 per cent over the fourth quarter, matching GDP expansion in the euro zone and double that in the United States.