Japan Expected To Hold Rates Steady Despite Strong Growth

TOKYO, Feb. 15 – Japans surprisingly strong growth in the last quarter of 2006 was just a one-time surge by an otherwise sluggish economy and is not likely to push the central bank to raise interest rates next week, economists in Tokyo said.

The Cabinet Office said Thursday that Japans economy grew at an annual rate of 4.8 percent in the three months ended Dec. 31, its fastest clip in three years and almost double the forecasts of many economists. The data showed the gain was due largely to consumer spending, which jumped 1.1 percent from the previous quarter.

That would appear to be rosy news for Japans $5 trillion economy, where the longest expansion since World War II seems to be losing steam because individuals arent spending enough. It would also bolster the case of the Bank of Japan and its governor, Toshihiko Fukui, who have made no secret of their desire to raise Japans benchmark overnight lending rate, now 0.25 percent.

A few analysts said the bank may still raise rates when its policy board meets for two days starting Tuesday . Hajime Takata, chief strategist at Mizuho Securities in Tokyo, said there was a 50-50 chance the bank may go to 0.5 percent, but that the economy was too weak to go beyond that.

However, other economists agreed that a rate hike was unlikely because, they said, there were simply too many doubts about Thursdays growth figures. They called the statistics deceptive and cautioned that consumer spending in particular was actually much weaker than it appeared.

Economists said this quarters increase in consumer spending was actually nothing more than a statistical rebound from the previous quarter, when consumer spending fell by the exact same rate, 1.1 percent, from the quarter before. They said the two figures essentially offset each other, indicating that consumer spending was still flat.

Consumer spending remains stagnant, said Takahide Kiuchi, senior economist at Nomura Securities in Tokyo. These growth figures dont change the economys overall outlook. Theres nothing here to justify a rate hike.

Richard Jerram, chief economist in Tokyo at Macquarie Securities, went further, saying that Thursdays unusually high figures actually reflected an even bigger problem: shortcomings in the governments data-collection method itself.

In particular, he faulted the way the government surveys households to measure consumer behavior. Mr. Jerram said the survey covers too few homes, creating a narrow sampling base that could lead to wide swings in results.

For a more accurate picture of the economys health, he said he averaged Thursdays growth figure of 4.8 percent with the figure from the previous quarter, when the economy grew a disappointing 0.3 percent. He said that would put the actual annual growth rate at closer to 2.5 percent.

Looking at the underlying trend makes more sense, Mr. Jerram said. How could there be this kind of volatility, with the economy going from a standstill to a surge in just one quarter? Despite the widespread doubts raised by economists, currency traders appeared to take a different view. Speculation that the central bank may act drove up the yen, which recently had fallen to four-year lows against the American dollar. On Thursday, the yen rose to a one-month high, hitting 119.94 yen to the dollar in afternoon trading.

Japans low interest rates have been the main reason for the weakening yen, which has lost ground against the dollar almost continually since last May. The low rates push Japanese investors to look overseas in search of higher returns, such as by buying United States government bonds. These investors must sell yen to buy dollars, driving down their own currency.

Mr. Fukui wants to raise rates, but not because of the yen. Rather, he and other bank officials have called that the current near-zero rates an unusual measure taken during Japans economically stagnant 1990s that is no longer necessary.

Bank officials have said they want rates to eventually rise to normal levels of 1 or 2 percent. This would also give the bank more room to adjust rates, and particularly to cut them again if the economy falls back into recession.

However, the bank has found itself waiting for Japans economy to show stronger signs of growth, and particularly a rise in prices, or inflation. During the current five-year expansion, growth rates have been stuck in low gear, and prices have stubbornly refused to rise.

Moreover, Mr. Fukui and the bank face intense political pressure from lawmakers and the administration of Prime Minister Shinzo Abe, who fear a rate hike could snuff out already anemic growth. Last month, the bank decided to hold interest rates steady, triggering widespread criticism that it had caved to political pressure.

But subsequent data, such as a government survey released late last month showing consumer prices rose only 0.1 percent in December, have suggested that the economy may indeed be faltering, economists said. Economists say consumer spending remains weak because companies havent been raising salaries despite record profits.

The Bank of Japan cant keep raising rates as it would like, said Mr. Takata of Mizuho. The economy is just not strong enough to sustain that.

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