Japan's economy grew 3.5% in Q4

Japan's economy grew at a brisk 3.5 per cent annualised pace in the fourth quarter of 2007, showing unexpected resilience in the face of growing fears of a US recession, official figures showed on Wednesday.

Investors reacted positively to the robust fourth-quarter growth, which was only slightly weaker than an initial estimate of a 3.7 per cent expansion in the three months to December.

While business investment held up better than expected, the report failed to completely erase concerns about the outlook for the world's second largest economy.

The worry is that Japan's export-led recovery could stall if US economic troubles deepen, hitting demand for Asian goods.

Gross domestic product (GDP) grew by 0.9 per cent compared with the previous quarter, unchanged from the initial estimate, the Cabinet Office said.

Financial markets had been braced for an even weaker performance after a finance ministry survey showed a 7.7 per cent year-on-year fall in capital spending in the three months to December.

"The figure was not revised down as much as the market had feared," said Daisuke Uno, chief strategist at Sumitomo Mitsui Banking Corp (SMBC).

The stronger-than expected-growth report helped to lift investors' spirits.

Japanese stocks surged 2.7 per cent in early trade, helped by a powerful rally on overseas markets after major central banks moved to pump hundreds of billions of dollars into the financial system to ease a global credit squeeze.

"Capital investment was not revised down as much as markets had expected, which signals it remains strong alongside robust exports," said Norio Miyagawa, economist at Shinko Research Institute.

"However, there remains a gap between stronger exports and a slump in household consumption," he added.

The government said corporate capital investment in new equipment and factories increased by 2.0 percent quarter-on-quarter, down slightly from an initial 2.9 per cent rise.

Private and household consumption both grew by a tepid 0.2 per cent. The Japanese economy is gradually rebounding from recession in the 1990s but consumer spending has remained sluggish, raising worries that the export-led recovery could be hit hard by a global slowdown.

Despite the better than expected GDP data, concerns about the health of the world's second largest economy have grown amid fears of a US recession that could hit Japanese exports and corporate earnings.