Japan revises up growth targets

Japan's growth was revised up to 1 per cent for the first quarter today but it may be a last hurrah for the world's second largest…

Japan's growth was revised up to 1 per cent for the first quarter today but it may be a last hurrah for the world's second largest economy as surging raw material prices and a global economic slowdown bite.

Adding to pressure on companies from spikes in materials costs, Wednesday's figures also showed wholesale inflation hit a 27-year high - reinforcing expectations of a rate rise by the Bank of Japan later this year.

The figures boosted Japanese stocks, helping the benchmark Nikkei average rise 1.2 per cent.

Economists said the data confirmed that strong exports, especially to booming emerging economies, led growth in the quarter, but they remained wary about the outlook.

"We can no longer count on consumption and exports that helped to push up growth in the first quarter," said Takeshi Minami, chief economist at Norinchukin Research Institute.

"Looking at data on more recent economic conditions, I think there is a possibility that Japan may go through a slight negative growth phase," he said.

Other economists echoed Minami's view and saw little scope for an imminent rate hike by the BOJ, although financial markets were increasingly focused on inflation concerns.

"As a slowdown in the real economy will become more evident toward the final quarter of this year, the Bank of Japan will have no choice but to hold off from raising interest rates in the fiscal year to next March," said Tatsushi Shikano, a senior economist at Mitsubishi UFJ Securities.

The revision in gross domestic product lifted growth from a preliminary estimate of 0.8 per cent and topped the median market forecast for a 0.9 per cent rise, with capex figures revised up.

The BOJ faces a balancing act between a slowing economy and soaring energy costs, but is expected to sit tight for a while with its interest rates already low at 0.5 per cent.

While some economists, such as Shikano, expect no BOJ move until next year, investors are increasingly focusing on warnings on inflation by other central banks and whether the BOJ may join the chorus of such concerns.

Derivatives contracts are pricing in about an 85 per cent chance of a Japanese rate hike by the end of this year, up from less than half earlier this week.