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. Last Updated: 07/27/2016

Japan Hits Best GDP in Decades

TOKYO -- Japan's economy scored its biggest growth in more than two decades in the first three months of this year, well above the most bullish forecasts, and sent financial markets into turmoil Tuesday.

The dollar plunged by nearly one yen, to 108 yen, and interest rates in the domestic market soared after the announcement that Japan's gross domestic product grew a startling 12.7 percent on an annualized basis.

The strong data prompted the government to declare that the economy finally is on the brink of a sustainable recovery, boosting prospects that a change in Japan's policy of low interest rates, which has continued for five years, may come sooner rather than later.

"Japan's economy is standing at the entrance to, or has just started to enter, the phase toward a sustainable recovery," said the vice minister of the Economic Planning Agency, Makoto Kobayashi.

Bank of Japan Governor Yasuo Matsushita also said the data was better than expected, but did not offer clues as to whether the central bank would start to nudge rates upward soon.

Japan's GDP, a key gauge of the economy's health, rose 3 percent in the January-March period after growth of 1.2 percent in the October-December quarter, the Economic Planning Agency said.

It was the strongest for any quarter in 23 years and translates into growth of 12.7 percent on an annualized basis.

For the financial year that ended in March 1996 as a whole, the economy posted growth of more than 2 percent, ending three years of negligible growth.

GDP, the nation's total output of goods and services minus net income from overseas production, rose a real 2.3 percent in 1995/96 after scant 0.5 percent growth the previous year.

Private analysts, who had generally expected a rise of well below 2 percent, were humbled by the extent to which the GDP data outpaced their own forecasts.

"Obviously they were a shocker," said Jane Berryman, a senior analyst at Fixed Income Technical Data.

"I'm proud to admit that although we were on the high side of forecasts, I don't think anybody had got this correct," Berryman added.

Jason James, a strategist at James Capel Pacific, said he was surprised that private consumption appeared to have been so robust.

"And that is going to be very important in driving the recovery from here, along with capital spending," he said.

"So I think the EPA is probably right in saying that means sustainable recovery is with us," he said.

"It has to mean the chance of a rate hike being earlier than previously expected is high," James said.

The central bank last September slashed its discount rate, which it charges on overnight lending to commercial banks, to a record low 0.5 percent.

It has been guiding short-term money rates to just below that level by controlling the amount of funds it supplies to the money market.

The move was intended to help nurse the fragile economy back to robust health after it struggled to recover from the slump that set in after the late 1980s "bubble" economy burst.

Many analysts had believed the central bank would wait until the autumn before letting short-term market rates rise and probably leave the discount rate alone until next year.

"I think the chance of an early shift in credit policy is getting higher, but it is uncertain if it will come very soon," said Tetsuro Sawano, a Nikko Research Center economist.

Sawano said the sustainability of strong economic recovery, as was seen in Tuesday's data, remains questionable as long as corporate capital spending, another key engine for economic growth, fails to regain its full strength.

Analysts warned that the economy might even shrink in the April-June quarter. Doubts linger also over whether consumption will keep growing at a time when poor employment conditions are keeping a tight lid on salaries.

Another pitfall for the economy is the current sharp decline in microchip prices worldwide, which could restrain growth of capital investment by major manufacturers.