Japan's economy flexed more muscle than expected in the third quarter, as rekindled demand at home and abroad fueled its largest expansion in more than two years.
Real gross domestic product grew at an annual pace of 4.8 percent in the July-September period, the government said Monday, beating even the most bullish of predictions. Kyodo news agency had forecast an average annualized increase of 2.6 percent based on its survey of economists.
GDP, or the total value of the nation's goods and services, has climbed for two straight quarters and recorded its fastest acceleration since a 5.7 percent jump in the first quarter of 2007. In the April-June quarter, GDP rose at a revised annual pace of 2.7 percent.
The latest data bolster evidence that the world's biggest economies are gaining strength, on track to finish the year in far better shape than they began. The U.S. and Europe finally shook off recession in the third quarter, and China's growth rate surged to an 8.9 percent pace.
Improving health among its trading partners is critical for Japan's prospects. The world's No. 2 economy relies heavily on exports to drive growth, and the sharp contraction in overseas demand last year sent Japan plunging into its worst recession since World War II.
Although Japan appears to have solidly left the recession behind, its future remains murky. Officials were quick to temper their enthusiasm Monday with warnings of ongoing risks that could undermine the recovery, including falling wages and prices.
Economists already expect an inevitable slowdown in the fourth quarter or early next year as the impact of emergency government spending fades.
"With winter bonuses down sharply and consumer sentiment flagging, we continue to see large downside risks to consumption in particular," said Goldman Sachs economist Chiwoong Lee.
On a quarterly basis, GDP was up 1.2 percent in July-September from the previous three-month period, according to the Cabinet Office's preliminary data.
A 1.6 percent increase in capital spending by companies accounted for a big chunk of that growth. Massive outlays by governments around the world have spurred demand, particularly in China and the rest of Asia. Exports jumped 6.4 percent from the April-June period, the Cabinet Office said.
Domestic stimulus measures and consumer incentives to buy eco-friendly products also helped. Consumer spending, which accounts for about 60 percent of Japanese GDP, rose 0.7 percent from the second quarter.
Corporate earnings reports over the last few weeks revealed that companies are beginning to benefit. Toyota Motor Corp., the world's biggest automaker, announced a surprise profit last quarter and trimmed its projected loss for the year. Rivals Honda Motor Co. and Nissan Motor Co. released healthier earnings reports as well.
"The critical thing is does (growth) continue or not?" said Richard Jerram, chief Japan economist at Macquarie Securities. "The evidence of second-round effects ... should offer reassurance that it is more than just a two-quarter pop. This is a cyclical recovery. Having said that, it doesn't look like it's strong enough to end deflation."
Deflation, which plagued Japan during its so-called "lost decade" of the 1990s, threatens to hamper growth by depressing company profits and causing consumers to postpone purchases. This can lead to production cuts, lower wages and increasing debt burdens.
"But it's seems to be a problem which they're not that interested in fixing," Jerram added.
Instead, the economic plan offered by Japan's new government centers on higher spending on social welfare programs, such as subsidies for families with children.
Kyohei Morita, chief economist at Barclays Capital in Tokyo, said Japan needs to implement more structural reforms to address stubbornly weak domestic demand. He suggests implementing a much-needed consumption tax hike to help ease anxieties about the pension system.
"If you raise taxes, there will be some reactionary declines in consumption," Morita said. "But that kind of volatility is a cost we have to pay to try to enjoy a longer-term upward trend."