TOKYO, June 10, 2010 (AFP) – Japan’s economy grew more than initially estimated in the first quarter, data showed Thursday, with exports keeping a recovery on track as signs emerged that domestic demand is strengthening.

A fourth straight quarter of expansion saw gross domestic product in the January-March period grow at an annualised 5.0 percent, beating last month’s estimate of 4.9 percent and expectations of 4.0 percent.

“The data was stronger than expected,” said Yoshiki Shinke, senior economist at Daiichi Life Research Institute. “It confirmed that the growth trend has continued.”

And there were signs that Japan’s domestic demand, hindered by deflation and a drag on growth, may also be strengthening after private and household consumption were both revised up from 0.3 percent to 0.4 percent.

A model introduces the Mercedes Benz SLS AMG at a hotel in Tokyo on June 10, 2010. AFP photo

Consumer sentiment improved in May to a reading of 42.8 from 42.0 in April according to a survey of 6,720 households. Any reading below 50 however means pessimists still outweigh optimists.

Analysts said data may show the recovery was starting to percolate through the wider economy, good news for the government as it looks to tackle the world’s largest public debt mountain without derailing the revival.

“Domestic demand is improving,” said Hiroshi Watanabe, economist at Daiwa Institute of Research. “Continued economic recovery should make things easier for politicians to discuss improving fiscal conditions,” he said.

The country has been stuck in the deflationary doldrums since March 2009 following the global economic downturn, as falling consumer prices deter corporate investment and consumption.

Exports, particularly to emerging Asian markets such as China, are driving Japan’s recovery from recession but its dependence on them was illustrated by their 0.9 percent contribution to the quarterly growth figure of 1.2 percent.

Booming demand for new cars, high tech products and factory parts has combined with a stimulus-driven domestic picture, raising hopes that Japan may eventually lock into a self-sustaining recovery.

Kan has targeted Japan’s finances as his biggest challenge, a change of tone from former premier Yukio Hatoyama’s administration, and has appointed fiscal hawk Yoshihiko Noda as the steward of Asia’s biggest economy.

Under increasing pressure to reduce a public debt ballooning towards 200 percent of gross domestic product as Europe’s deepening fiscal crisis raises sovereign debt scrutiny, Kan has openly discussed hiking taxes as a remedy.

Watanabe said a stronger economy gave politicians more scope to discuss measures such as “raising the consumption tax — moves that could slow economic growth temporarily but that are necessary for the long-term.”

On a quarterly basis the GDP reading was unchanged. The economy grew 1.2 percent compared with the previous four months, beating expectations of a downward revision to 1.0 percent.

While business investment fell to 0.6 percent from an initial estimate of a 1.0 percent rise, the revision was less severe than some economists had expected.

Japan’s main guage of wholesale prices of goods such as petroleum and coal used by producers rose 0.4 percent in May, the first year-on-year increase since 2008, separate Bank of Japan data said Thursday.

As demand from surging economies such as China increases prices for raw materials, Japanese companies face being squeezed further by being unable to pass costs on to consumers in a deflationary environment.

However, analysts warned that Japan’s dependence on external demand would be a risk in the future in view of eurozone debt fears and Beijing’s efforts to cool China’s rampant economy to keep inflation in check.

In Tokyo, the Nikkei 225 index closed 1.10 percent higher.

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Source: SGGP