Japan: Strong growth figures will not make interest rate decision easy

The full picture behind the strongest rate of economic growth in Japan for nearly three years gives plenty of reasons both "for" and "against" rising interest rates, according to F&C.

The data released on Thursday shows that in the fourth quarter of last year, the Japanese economy expanded by an annualised 4.8%, exceeding the consensus estimate of 3.8% by 1%.

"We are expecting the Bank of Japan to debate an interest rate hike long and hard at the 20-21 February monetary policy meeting. But the outcome is too close to call because the latest GDP release contained enough ammunition for both hawks and doves" , said Jamie Jenkins, fund manager of the F&C Japan Equity Sicav fund.

Jenkins explained that the better than expected consumer data was not, in fact, the main overwhelming driver behind this growth and that there were solid contributions from both private housing investment, at 2% in the fourth quarter 2006 compared with – 0.1% in the previous quarter. There was also a 2.7% increase in public spending in Q4 against a fall of 4.8% in the third quarter.

"This paints a picture of steady current economic growth in Japan but one where the corporate sector continues to drive the recovery, whilst personal consumption remains weak and price inflation muted" , he added

Jenkins concluded: "The latest GDP data release is unlikely to tip the balance of opinion within the Bank of Japan towards raising rates yet given the political pressure gathered against choking off the weak recovery in consumption."