Japan's economy is on the mend

Japan's economy grew at its fastest pace in two years in the three months to the end of June as companies stepped up spending on machinery to feed strong demand for exports, revised data showed on yesterday.

The data supported the view that the world's second-largest economy is on the mend, though many economists had doubts over whether the growth would stay as strong, particularly after a cool summer that has dampened demand.

"There's no doubt the economy is recovering, but the figures are probably overstating it," said Toshikimi Kaneki, economist at Sumitomo Trust and Banking.

The government said real GDP expanded 1.0 percent in April to June from the previous quarter, up from an initial reading of 0.6 percent.

On an annualized basis, Japan's economy expanded 3.9 percent, exceeding growth of 3.1 percent in the US, the biggest single destination for Japanese exports.

"Japan's economy is still laden with structural weaknesses. I don't think the 3.9 percent annualized growth rate is a sustainable one," said Merrill Lynch economist Takuji Aida.

"We believe Japan's economy won't enter a phase of sustained and stable growth until the end of the next fiscal year."

The GDP figures, which are adjusted for price changes, showed spending on plant and machinery rose 4.7 percent from the previous quarter, also the biggest rise in 10 quarters. The government had initially reported a 1.3 percent rise.

As evidence of an improving climate for business, Casio Computer Co Ltd said yesterday that strong sales of digital cameras and watches would help it easily beat its group recurring profit forecast of ?6 billion (US$51 million) for the first half.

Market reaction to the GDP data was restrained, but there was speculation that Japanese authorities had intervened to hold back the yen from rising too much against the US dollar. By the afternoon it was around ?116.80/85 almost flat from late on Tuesday in New York.

The strong yen reflects optimism over Japan's economy and stock market, but officials worry it could undermTuesday on the improved outlook, finished down 0.6 percent at 10,856.32 on yesterday.

Despite the budding optimism, however, analysts said the economy was still vulnerable to chronic deflation and massive bad loans in the banking system.

Many also saw slower growth ahead, saying cool weather since July had discouraged consumers from shopping and eating out.